Companhia Estadual de Distribuição de Energia Elétrica (BVMF:CEED3) Shareholders Will Want The ROCE Trajectory To Continue

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. So on that note, Companhia Estadual de Distribuição de Energia Elétrica (BVMF:CEED3) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Companhia Estadual de Distribuição de Energia Elétrica, this is the formula:

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

0.088 = R$446m ÷ (R$7.5b - R$2.4b) (Based on the trailing twelve months to June 2023).

So, Companhia Estadual de Distribuição de Energia Elétrica has an ROCE of 8.8%. Ultimately, that's a low return and it under-performs the Electric Utilities industry average of 13%.

View our latest analysis for Companhia Estadual de Distribuição de Energia Elétrica

Historical performance is a great place to start when researching a stock so above you can see the gauge for Companhia Estadual de Distribuição de Energia Elétrica's ROCE against it's prior returns. If you're interested in investigating Companhia Estadual de Distribuição de Energia Elétrica's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Companhia Estadual de Distribuição de Energia Elétrica's ROCE Trending?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The data shows that returns on capital have increased substantially over the last five years to 8.8%. The amount of capital employed has increased too, by 209%. 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 Estadual de Distribuição de Energia Elétrica has decreased current liabilities to 32% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line On Companhia Estadual de Distribuição de Energia Elétrica's ROCE

All in all, it's terrific to see that Companhia Estadual de Distribuição de Energia Elétrica is reaping the rewards from prior investments and is growing its capital base. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 24% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

Companhia Estadual de Distribuição de Energia Elétrica does have some risks though, and we've spotted 2 warning signs for Companhia Estadual de Distribuição de Energia Elétrica that you might be interested in.

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.