Returns On Capital At Afluente Transmissão de Energia Elétrica (BVMF:AFLT3) Have Stalled

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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Afluente Transmissão de Energia Elétrica (BVMF:AFLT3) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Afluente Transmissão de Energia Elétrica is:

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

0.11 = R$30m ÷ (R$314m - R$49m) (Based on the trailing twelve months to September 2024).

So, Afluente Transmissão de Energia Elétrica has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Electric Utilities industry average of 12%.

See our latest analysis for Afluente Transmissão de Energia Elétrica

Historical performance is a great place to start when researching a stock so above you can see the gauge for Afluente Transmissão de Energia Elétrica's ROCE against it's prior returns. If you're interested in investigating Afluente Transmissão de Energia Elétrica's past further, check out this free graph covering Afluente Transmissão de Energia Elétrica's past earnings, revenue and cash flow.

The Trend Of ROCE

Over the past five years, Afluente Transmissão de Energia Elétrica's ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So unless we see a substantial change at Afluente Transmissão de Energia Elétrica in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 16% of total assets, this reported ROCE would probably be less than11% because total capital employed would be higher.The 11% ROCE could be even lower if current liabilities weren't 16% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.

The Bottom Line

We can conclude that in regards to Afluente Transmissão de Energia Elétrica's returns on capital employed and the trends, there isn't much change to report on. And investors appear hesitant that the trends will pick up because the stock has fallen 13% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Afluente Transmissão de Energia Elétrica does have some risks though, and we've spotted 1 warning sign for Afluente Transmissão de Energia Elétrica that you might be interested in.

While Afluente Transmissão de Energia Elétrica isn't earning the highest return, check out this free list of companies that are 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.