Returns At Companhia de Eletricidade do Estado da Bahia - COELBA (BVMF:CEEB3) Are On The Way Up

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Speaking of which, we noticed some great changes in Companhia de Eletricidade do Estado da Bahia - COELBA's (BVMF:CEEB3) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Companhia de Eletricidade do Estado da Bahia - COELBA:

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

0.17 = R$3.4b ÷ (R$27b - R$6.7b) (Based on the trailing twelve months to March 2023).

Therefore, Companhia de Eletricidade do Estado da Bahia - COELBA has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 12% generated by the Electric Utilities industry.

See our latest analysis for Companhia de Eletricidade do Estado da Bahia - COELBA

Historical performance is a great place to start when researching a stock so above you can see the gauge for Companhia de Eletricidade do Estado da Bahia - COELBA's ROCE against it's prior returns. If you'd like to look at how Companhia de Eletricidade do Estado da Bahia - COELBA 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 Companhia de Eletricidade do Estado da Bahia - COELBA Tell Us?

Investors would be pleased with what's happening at Companhia de Eletricidade do Estado da Bahia - COELBA. The data shows that returns on capital have increased substantially over the last five years to 17%. Basically the business is earning more per dollar of capital invested and in addition to that, 101% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Key Takeaway

In summary, it's great to see that Companhia de Eletricidade do Estado da Bahia - COELBA can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you'd like to know more about Companhia de Eletricidade do Estado da Bahia - COELBA, we've spotted 2 warning signs, and 1 of them doesn't sit too well with us.

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.