Some Investors May Be Worried About Afluente Transmissão de Energia Elétrica's (BVMF:AFLT3) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Afluente Transmissão de Energia Elétrica (BVMF:AFLT3), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Afluente Transmissão de Energia Elétrica:

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

0.10 = R$29m ÷ (R$313m - R$31m) (Based on the trailing twelve months to September 2023).

Thus, Afluente Transmissão de Energia Elétrica has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 12% generated by the Electric Utilities industry.

See 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 want to delve into the historical earnings, revenue and cash flow of Afluente Transmissão de Energia Elétrica, check out these free graphs here.

What Does the ROCE Trend For Afluente Transmissão de Energia Elétrica Tell Us?

On the surface, the trend of ROCE at Afluente Transmissão de Energia Elétrica doesn't inspire confidence. Over the last five years, returns on capital have decreased to 10% from 33% 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

In summary, we're somewhat concerned by Afluente Transmissão de Energia Elétrica's diminishing returns on increasing amounts of capital. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 140%. 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.

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. 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.