Returns On Capital Are Showing Encouraging Signs At CPFL Energia (BVMF:CPFE3)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. 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 who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.19 = R$11b ÷ (R$76b - R$19b) (Based on the trailing twelve months to March 2024).

Thus, CPFL Energia has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Electric Utilities industry average of 12% it's much better.

View 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'd like to see what analysts are forecasting going forward, you should check out our free analyst report for CPFL Energia .

What The Trend Of ROCE Can Tell Us

Investors would be pleased with what's happening at CPFL Energia. Over the last five years, returns on capital employed have risen substantially to 19%. The amount of capital employed has increased too, by 65%. So we're very much inspired by what we're seeing at CPFL Energia thanks to its ability to profitably reinvest capital.

In Conclusion...

In summary, it's great to see that CPFL Energia can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a solid 69% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you'd like to know more about CPFL Energia, we've spotted 3 warning signs, and 1 of them makes us a bit uncomfortable.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.

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