Companhia Estadual de Distribuição de Energia Elétrica (BVMF:CEED3) Might Have The Makings Of A Multi-Bagger

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. So when we looked at Companhia Estadual de Distribuição de Energia Elétrica (BVMF:CEED3) and its trend of ROCE, we really liked what we saw.

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. Analysts use this formula to calculate it for Companhia Estadual de Distribuição de Energia Elétrica:

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

0.076 = R$381m ÷ (R$7.7b - R$2.7b) (Based on the trailing twelve months to March 2024).

Thus, Companhia Estadual de Distribuição de Energia Elétrica has an ROCE of 7.6%. Ultimately, that's a low return and it under-performs the Electric Utilities industry average of 12%.

Check out our latest analysis for Companhia Estadual de Distribuição de Energia Elétrica

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'd like to look at how Companhia Estadual de Distribuição de Energia Elétrica has performed in the past in other metrics, you can view this free graph of Companhia Estadual de Distribuição de Energia Elétrica's past earnings, revenue and cash flow.

What Can We Tell From Companhia Estadual de Distribuição de Energia Elétrica's ROCE Trend?

The fact that Companhia Estadual de Distribuição de Energia Elétrica is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 7.6% on its capital. And unsurprisingly, like most companies trying to break into the black, Companhia Estadual de Distribuição de Energia Elétrica is utilizing 723% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a related note, the company's ratio of current liabilities to total assets has decreased to 35%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

In Conclusion...

In summary, it's great to see that Companhia Estadual de Distribuição de Energia Elétrica has managed to break into profitability and is continuing to reinvest in its business. And since the stock has dived 75% over the last three years, there may be other factors affecting the company's prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

If you want to continue researching Companhia Estadual de Distribuição de Energia Elétrica, you might be interested to know about the 3 warning signs that our analysis has discovered.

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.

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