Returns On Capital Signal Tricky Times Ahead For Afluente Transmissão de Energia Elétrica (BVMF:AFLT3)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Afluente Transmissão de Energia Elétrica (BVMF:AFLT3), we don't think it's current trends fit the mold of a multi-bagger.

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. 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)

0.099 = R$27m ÷ (R$307m - R$36m) (Based on the trailing twelve months to June 2023).

Thus, Afluente Transmissão de Energia Elétrica has an ROCE of 9.9%. In absolute terms, that's a low return but it's around the Electric Utilities industry average of 12%.

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.

So How Is Afluente Transmissão de Energia Elétrica's ROCE Trending?

When we looked at the ROCE trend at Afluente Transmissão de Energia Elétrica, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.9% from 29% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line On Afluente Transmissão de Energia Elétrica's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Afluente Transmissão de Energia Elétrica have fallen, meanwhile the business is employing more capital than it was five years ago. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 154%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you want to continue researching Afluente Transmissão de Energia Elétrica, you might be interested to know about the 2 warning signs that our analysis has discovered.

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.