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

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Companhia de Eletricidade do Estado da Bahia - COELBA (BVMF:CEEB3) and its trend of ROCE, we really liked what we saw.

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)

0.16 = R$3.2b ÷ (R$26b - R$5.2b) (Based on the trailing twelve months to September 2022).

Therefore, 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 13% 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 want to delve into the historical earnings, revenue and cash flow of Companhia de Eletricidade do Estado da Bahia - COELBA, check out these free graphs here.

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

Companhia de Eletricidade do Estado da Bahia - COELBA is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 16%. Basically the business is earning more per dollar of capital invested and in addition to that, 141% 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.

One more thing to note, Companhia de Eletricidade do Estado da Bahia - COELBA has decreased current liabilities to 20% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Companhia de Eletricidade do Estado da Bahia - COELBA has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Key Takeaway

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Companhia de Eletricidade do Estado da Bahia - COELBA has. Since the stock has returned a staggering 159% 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.

On a final note, we found 2 warning signs for Companhia de Eletricidade do Estado da Bahia - COELBA (1 is significant) you should be aware of.

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.