The Returns On Capital At Afluente Transmissão de Energia Elétrica (BVMF:AFLT3) Don't Inspire Confidence

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. 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.

Return On Capital Employed (ROCE): What is it?

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. 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)

0.095 = R$19m ÷ (R$208m - R$7.0m) (Based on the trailing twelve months to December 2020).

Therefore, Afluente Transmissão de Energia Elétrica has an ROCE of 9.5%. In absolute terms, that's a low return but it's around the Electric Utilities industry average of 11%.

Check out 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 of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Afluente Transmissão de Energia Elétrica's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 14% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Afluente Transmissão de Energia Elétrica's ROCE

In summary, Afluente Transmissão de Energia Elétrica is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 510% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Afluente Transmissão de Energia Elétrica does have some risks though, and we've spotted 2 warning signs for Afluente Transmissão de Energia Elétrica that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. 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.
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