CPFL Energia (BVMF:CPFE3) Might Have The Makings Of A Multi-Bagger

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at CPFL Energia (BVMF:CPFE3) so let's look a bit deeper.

What Is 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 CPFL Energia, this is the formula:

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

0.18 = R$11b ÷ (R$74b - R$16b) (Based on the trailing twelve months to June 2024).

Therefore, CPFL Energia has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 13% generated by the Electric Utilities industry.

See our latest analysis for CPFL Energia

In the above chart we have measured CPFL Energia's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for CPFL Energia .

How Are Returns Trending?

CPFL Energia is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 18%. The amount of capital employed has increased too, by 52%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

In Conclusion...

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what CPFL Energia has. And with a respectable 59% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if CPFL Energia can keep these trends up, it could have a bright future ahead.

One final note, you should learn about the 3 warning signs we've spotted with CPFL Energia (including 1 which is concerning) .

While CPFL Energia may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.