What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at CPFL Energia (BVMF:CPFE3) and its trend of ROCE, we really liked what we saw.
Understanding 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. Analysts use this formula to calculate it for CPFL Energia:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = R$11b ÷ (R$79b - R$18b) (Based on the trailing twelve months to June 2025).
So, CPFL Energia has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 12% generated by the Electric Utilities industry.
View our latest analysis for CPFL Energia
Above you can see how the current ROCE for CPFL Energia compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering CPFL Energia for free.
What The Trend Of ROCE Can Tell Us
We like the trends that we're seeing from CPFL Energia. The data shows that returns on capital have increased substantially over the last five years to 18%. Basically the business is earning more per dollar of capital invested and in addition to that, 60% more capital is being employed now too. So we're very much inspired by what we're seeing at CPFL Energia thanks to its ability to profitably reinvest capital.
Our Take On CPFL Energia's ROCE
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. Since the stock has returned a staggering 131% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
CPFL Energia does have some risks, we noticed 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.
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.
Valuation is complex, but we're here to simplify it.
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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.