Afluente Transmissão de Energia Elétrica (BVMF:AFLT3) Is Achieving High Returns On Its Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of Afluente Transmissão de Energia Elétrica (BVMF:AFLT3) 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. To calculate this metric for Afluente Transmissão de Energia Elétrica, this is the formula:

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

0.39 = R$106m ÷ (R$280m - R$6.0m) (Based on the trailing twelve months to March 2022).

Thus, Afluente Transmissão de Energia Elétrica has an ROCE of 39%. In absolute terms that's a great return and it's even better than the Electric Utilities industry average of 14%.

View our latest analysis for Afluente Transmissão de Energia Elétrica

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Afluente Transmissão de Energia Elétrica's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Afluente Transmissão de Energia Elétrica's ROCE Trend?

Investors would be pleased with what's happening at Afluente Transmissão de Energia Elétrica. The data shows that returns on capital have increased substantially over the last five years to 39%. 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 361%. 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.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 2.1%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Afluente Transmissão de Energia Elétrica has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Key Takeaway

All in all, it's terrific to see that Afluente Transmissão de Energia Elétrica is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Afluente Transmissão de Energia Elétrica can keep these trends up, it could have a bright future ahead.

Afluente Transmissão de Energia Elétrica does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is significant...

Afluente Transmissão de Energia Elétrica 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.