Returns On Capital At Companhia de Saneamento Básico do Estado de São Paulo - SABESP (BVMF:SBSP3) Have Stalled

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Companhia de Saneamento Básico do Estado de São Paulo - SABESP (BVMF:SBSP3), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Companhia de Saneamento Básico do Estado de São Paulo - SABESP, this is the formula:

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

0.096 = R$4.9b ÷ (R$57b - R$6.2b) (Based on the trailing twelve months to March 2023).

So, Companhia de Saneamento Básico do Estado de São Paulo - SABESP has an ROCE of 9.6%. On its own, that's a low figure but it's around the 9.5% average generated by the Water Utilities industry.

Check out 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

SWOT Analysis for Companhia de Saneamento Básico do Estado de São Paulo - SABESP

The Trend Of ROCE

In terms of Companhia de Saneamento Básico do Estado de São Paulo - SABESP's historical ROCE trend, it doesn't exactly demand attention. The company has employed 42% more capital in the last five years, and the returns on that capital have remained stable at 9.6%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

In Conclusion...

Long story short, while Companhia de Saneamento Básico do Estado de São Paulo - SABESP has been reinvesting its capital, the returns that it's generating haven't increased. Yet to long term shareholders the stock has gifted them an incredible 163% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Companhia de Saneamento Básico do Estado de São Paulo - SABESP does have some risks though, and we've spotted 2 warning signs for Companhia de Saneamento Básico do Estado de São Paulo - SABESP that you might be interested in.

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.

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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.