The Trends At Companhia de Saneamento Básico do Estado de São Paulo - SABESP (BVMF:SBSP3) That You Should Know About

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. With that in mind, the ROCE of Companhia de Saneamento Básico do Estado de São Paulo - SABESP (BVMF:SBSP3) looks decent, right now, so lets see what the trend of returns can tell us.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Companhia de Saneamento Básico do Estado de São Paulo - SABESP is:

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

0.10 = R$4.4b ÷ (R$48b - R$4.2b) (Based on the trailing twelve months to September 2020).

Therefore, Companhia de Saneamento Básico do Estado de São Paulo - SABESP has an ROCE of 10%. That's a pretty standard return and it's in line with the industry average of 9.5%.

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.

What Can We Tell From Companhia de Saneamento Básico do Estado de São Paulo - SABESP's ROCE Trend?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 48% more capital in the last five years, and the returns on that capital have remained stable at 10%. 10% is a pretty standard return, and it provides some comfort knowing that Companhia de Saneamento Básico do Estado de São Paulo - SABESP has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

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

The main thing to remember is that Companhia de Saneamento Básico do Estado de São Paulo - SABESP has proven its ability to continually reinvest at respectable rates of return. On top of that, the stock has rewarded shareholders with a remarkable 119% return to those who've held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

Companhia de Saneamento Básico do Estado de São Paulo - SABESP does have some risks though, and we've spotted 3 warning signs for Companhia de Saneamento Básico do Estado de São Paulo - SABESP that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. 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.
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