Returns on Capital Paint A Bright Future For Companhia de Saneamento Básico do Estado de São Paulo - SABESP (BVMF:SBSP3)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at the ROCE trend of Companhia de Saneamento Básico do Estado de São Paulo - SABESP (BVMF:SBSP3) we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)

0.23 = R$16b ÷ (R$76b - R$7.2b) (Based on the trailing twelve months to September 2024).

Thus, Companhia de Saneamento Básico do Estado de São Paulo - SABESP has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 9.9% earned by companies in a similar industry.

View 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 analyst report for Companhia de Saneamento Básico do Estado de São Paulo - SABESP .

The Trend Of ROCE

Investors would be pleased with what's happening at Companhia de Saneamento Básico do Estado de São Paulo - SABESP. The data shows that returns on capital have increased substantially over the last five years to 23%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 66%. So we're very much inspired by what we're seeing at Companhia de Saneamento Básico do Estado de São Paulo - SABESP thanks to its ability to profitably reinvest capital.

What We Can Learn From 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 proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 94% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to know some of the risks facing Companhia de Saneamento Básico do Estado de São Paulo - SABESP we've found 2 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

Companhia de Saneamento Básico do Estado de São Paulo - SABESP is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.