The Returns On Capital At Auren Energia (BVMF:AURE3) Don't Inspire Confidence

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'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Auren Energia (BVMF:AURE3) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

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 Auren Energia is:

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

0.031 = R$881m ÷ (R$33b - R$4.3b) (Based on the trailing twelve months to June 2023).

So, Auren Energia has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 3.9%.

See our latest analysis for Auren Energia

In the above chart we have measured Auren Energia's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Auren Energia here for free.

What Does the ROCE Trend For Auren Energia Tell Us?

On the surface, the trend of ROCE at Auren Energia doesn't inspire confidence. Over the last four years, returns on capital have decreased to 3.1% from 3.9% four years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

In Conclusion...

While returns have fallen for Auren Energia in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 7.7% to shareholders over the last year. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you'd like to know more about Auren Energia, we've spotted 2 warning signs, and 1 of them is concerning.

While Auren Energia may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.