Here's What Companhia Distribuidora de Gás do Rio de Janeiro - CEG's (BVMF:CEGR3) Strong Returns On Capital Means

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. That's why when we briefly looked at Companhia Distribuidora de Gás do Rio de Janeiro - CEG's (BVMF:CEGR3) ROCE trend, we were very happy with what we saw.

Return On Capital Employed (ROCE): What is it?

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 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)

0.27 = R$653m ÷ (R$3.5b - R$1.1b) (Based on the trailing twelve months to September 2020).

Therefore, Companhia Distribuidora de Gás do Rio de Janeiro - CEG has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Gas Utilities industry average of 6.9%.

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

Historical performance is a great place to start when researching a stock so above you can see the gauge for Companhia Distribuidora de Gás do Rio de Janeiro - CEG's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Companhia Distribuidora de Gás do Rio de Janeiro - CEG, check out these free graphs here.

So How Is Companhia Distribuidora de Gás do Rio de Janeiro - CEG's ROCE Trending?

It's hard not to be impressed by Companhia Distribuidora de Gás do Rio de Janeiro - CEG's returns on capital. The company has employed 31% more capital in the last five years, and the returns on that capital have remained stable at 27%. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

Our Take On 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 the stock has done incredibly well with a 208% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

One more thing, we've spotted 1 warning sign facing Companhia Distribuidora de Gás do Rio de Janeiro - CEG that you might find interesting.

Companhia Distribuidora de Gás do Rio de Janeiro - CEG is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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This article by Simply Wall St is general in nature. 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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