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

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. 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.

Understanding 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$3.6b ÷ (R$26b - R$4.9b) (Based on the trailing twelve months to June 2022).

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 13% 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'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.

So How Is Companhia de Eletricidade do Estado da Bahia - COELBA's ROCE Trending?

We like the trends that we're seeing from Companhia de Eletricidade do Estado da Bahia - COELBA. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 17%. Basically the business is earning more per dollar of capital invested and in addition to that, 173% more capital is being employed now too. So we're very much inspired by what we're seeing at Companhia de Eletricidade do Estado da Bahia - COELBA thanks to its ability to profitably reinvest capital.

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.

What We Can Learn From Companhia de Eletricidade do Estado da Bahia - COELBA's ROCE

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 a remarkable 177% total return over the last five years tells us that investors are expecting more good things to come in the future. 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.

If you want to know some of the risks facing Companhia de Eletricidade do Estado da Bahia - COELBA we've found 3 warning signs (2 don't sit too well with us!) that you should be aware of before investing here.

While Companhia de Eletricidade do Estado da Bahia - COELBA isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.