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

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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.

What Is 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. The formula for this calculation on Companhia Estadual de Distribuição de Energia Elétrica is:

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

0.073 = R$367m ÷ (R$7.4b - R$2.3b) (Based on the trailing twelve months to September 2024).

Thus, Companhia Estadual de Distribuição de Energia Elétrica has an ROCE of 7.3%. In absolute terms, that's a low return and it also under-performs the Electric Utilities industry average of 12%.

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

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

Companhia Estadual de Distribuição de Energia Elétrica has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 7.3% on its capital, because three years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.

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

To sum it up, Companhia Estadual de Distribuição de Energia Elétrica is collecting higher returns from the same amount of capital, and that's impressive. And since the stock has dived 89% over the last five years, there may be other factors affecting the company's prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

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.

While Companhia Estadual de Distribuição de Energia Elétrica 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.