Investors Met With Slowing Returns on Capital At Ampla Energia e Serviços (BVMF:CBEE3)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. However, after investigating Ampla Energia e Serviços (BVMF:CBEE3), we don't think it's current trends fit the mold of a multi-bagger.

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

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 Ampla Energia e Serviços:

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

0.03 = R$237m ÷ (R$12b - R$3.9b) (Based on the trailing twelve months to March 2021).

Thus, Ampla Energia e Serviços has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Electric Utilities industry average of 12%.

See our latest analysis for Ampla Energia e Serviços

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ampla Energia e Serviços' ROCE against it's prior returns. If you'd like to look at how Ampla Energia e Serviços has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Ampla Energia e Serviços Tell Us?

There are better returns on capital out there than what we're seeing at Ampla Energia e Serviços. The company has employed 27% more capital in the last five years, and the returns on that capital have remained stable at 3.0%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 33% of total assets, this reported ROCE would probably be less than3.0% because total capital employed would be higher.The 3.0% ROCE could be even lower if current liabilities weren't 33% of total assets, because the the formula would show a larger base of total capital employed. So while current liabilities isn't high right now, keep an eye out in case it increases further, because this can introduce some elements of risk.

Our Take On Ampla Energia e Serviços' ROCE

In conclusion, Ampla Energia e Serviços has been investing more capital into the business, but returns on that capital haven't increased. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. 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.

If you'd like to know more about Ampla Energia e Serviços, we've spotted 5 warning signs, and 1 of them is a bit concerning.

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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