Companhia Distribuidora de Gás do Rio de Janeiro - CEG (BVMF:CEGR3) Looks To Prolong Its Impressive Returns

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over Companhia Distribuidora de Gás do Rio de Janeiro - CEG's (BVMF:CEGR3) trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Companhia Distribuidora de Gás do Rio de Janeiro - CEG, this is the formula:

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

0.25 = R$688m ÷ (R$3.9b - R$1.2b) (Based on the trailing twelve months to September 2021).

So, Companhia Distribuidora de Gás do Rio de Janeiro - CEG has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Gas Utilities industry average of 14%.

View our latest analysis for Companhia Distribuidora de Gás do Rio de Janeiro - CEG

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 Distribuidora de Gás do Rio de Janeiro - CEG has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Companhia Distribuidora de Gás do Rio de Janeiro - CEG's history of ROCE, it's quite impressive. Over the past five years, ROCE has remained relatively flat at around 25% and the business has deployed 37% more capital into its operations. Now considering ROCE is an attractive 25%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If Companhia Distribuidora de Gás do Rio de Janeiro - CEG can keep this up, we'd be very optimistic about its future.

What We Can Learn From Companhia Distribuidora de Gás do Rio de Janeiro - CEG's ROCE

In summary, we're delighted to see that Companhia Distribuidora de Gás do Rio de Janeiro - CEG has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And long term investors would be thrilled with the 187% return they've received over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

Like most companies, Companhia Distribuidora de Gás do Rio de Janeiro - CEG does come with some risks, and we've found 1 warning sign that you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.