Returns On Capital Are Showing Encouraging Signs At Companhia de Eletricidade do Estado da Bahia - COELBA (BVMF:CEEB3)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Companhia de Eletricidade do Estado da Bahia - COELBA (BVMF:CEEB3) so let's look a bit deeper.

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

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. To calculate this metric for Companhia de Eletricidade do Estado da Bahia - COELBA, this is the formula:

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

0.16 = R$3.3b ÷ (R$25b - R$4.7b) (Based on the trailing twelve months to March 2022).

So, Companhia de Eletricidade do Estado da Bahia - COELBA has an ROCE of 16%. That's a relatively normal return on capital, and it's around the 14% generated by the Electric Utilities industry.

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

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're interested in investigating Companhia de Eletricidade do Estado da Bahia - COELBA's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

Companhia de Eletricidade do Estado da Bahia - COELBA is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 16%. Basically the business is earning more per dollar of capital invested and in addition to that, 173% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a related note, the company's ratio of current liabilities to total assets has decreased to 19%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line On Companhia de Eletricidade do Estado da Bahia - COELBA's ROCE

To sum it up, Companhia de Eletricidade do Estado da Bahia - COELBA has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 146% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Companhia de Eletricidade do Estado da Bahia - COELBA does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those don't sit too well with us...

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. 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.