Investors Met With Slowing Returns on Capital At Companhia de Saneamento Básico do Estado de São Paulo - SABESP (BVMF:SBSP3)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. That's why when we briefly looked at Companhia de Saneamento Básico do Estado de São Paulo - SABESP's (BVMF:SBSP3) ROCE trend, we were pretty happy with what we saw.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Companhia de Saneamento Básico do Estado de São Paulo - SABESP:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.10 = R$5.2b ÷ (R$59b - R$7.1b) (Based on the trailing twelve months to September 2023).

Thus, Companhia de Saneamento Básico do Estado de São Paulo - SABESP has an ROCE of 10%. By itself that's a normal return on capital and it's in line with the industry's average returns of 10%.

See our latest analysis for Companhia de Saneamento Básico do Estado de São Paulo - SABESP

In the above chart we have measured Companhia de Saneamento Básico do Estado de São Paulo - SABESP's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Companhia de Saneamento Básico do Estado de São Paulo - SABESP here for free.

So How Is Companhia de Saneamento Básico do Estado de São Paulo - SABESP's ROCE Trending?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 10% for the last five years, and the capital employed within the business has risen 37% in that time. Since 10% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

Our Take On Companhia de Saneamento Básico do Estado de São Paulo - SABESP's ROCE

To sum it up, Companhia de Saneamento Básico do Estado de São Paulo - SABESP has simply been reinvesting capital steadily, at those decent rates of return. And the stock has done incredibly well with a 107% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

One more thing, we've spotted 1 warning sign facing Companhia de Saneamento Básico do Estado de São Paulo - SABESP that you might find interesting.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.