Returns On Capital Are Showing Encouraging Signs At Companhia Estadual de Distribuição de Energia Elétrica (BVMF:CEED3)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.079 = R$386m ÷ (R$7.0b - R$2.1b) (Based on the trailing twelve months to March 2023).

Therefore, Companhia Estadual de Distribuição de Energia Elétrica has an ROCE of 7.9%. In absolute terms, that's a low return and it also under-performs the Electric Utilities industry average of 12%.

Check out 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 want to delve into the historical earnings, revenue and cash flow of Companhia Estadual de Distribuição de Energia Elétrica, check out these free graphs here.

How Are Returns Trending?

We're delighted to see that Companhia Estadual de Distribuição de Energia Elétrica is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 7.9% on its capital. Not only that, but the company is utilizing 153% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 30%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. 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.

What We Can Learn From Companhia Estadual de Distribuição de Energia Elétrica's ROCE

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 fallen 15% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing, we've spotted 2 warning signs facing Companhia Estadual de Distribuição de Energia Elétrica that you might find interesting.

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.