Why The 23% Return On Capital At Companhia de Saneamento Básico do Estado de São Paulo - SABESP (BVMF:SBSP3) Should Have Your Attention

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. And in light of that, the trends we're seeing at Companhia de Saneamento Básico do Estado de São Paulo - SABESP's (BVMF:SBSP3) look very promising so lets take a look.

Understanding Return On Capital Employed (ROCE)

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. 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).

So, 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'd like, you can check out the forecasts from the analysts covering Companhia de Saneamento Básico do Estado de São Paulo - SABESP for free.

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

We like the trends that we're seeing from 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%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

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

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Companhia de Saneamento Básico do Estado de São Paulo - SABESP has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 74% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing: We've identified 2 warning signs with Companhia de Saneamento Básico do Estado de São Paulo - SABESP (at least 1 which is concerning) , and understanding these would certainly be useful.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.