Capital Allocation Trends At Engie Brasil Energia (BVMF:EGIE3) Aren't Ideal

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Having said that, from a first glance at Engie Brasil Energia (BVMF:EGIE3) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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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. Analysts use this formula to calculate it for Engie Brasil Energia:

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

0.11 = R$5.6b ÷ (R$57b - R$7.6b) (Based on the trailing twelve months to September 2025).

Thus, Engie Brasil Energia has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 6.7% generated by the Renewable Energy industry.

See our latest analysis for Engie Brasil Energia

Above you can see how the current ROCE for Engie Brasil Energia compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Engie Brasil Energia .

How Are Returns Trending?

On the surface, the trend of ROCE at Engie Brasil Energia doesn't inspire confidence. Around five years ago the returns on capital were 16%, but since then they've fallen to 11%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Engie Brasil Energia's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Engie Brasil Energia is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 38% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

If you'd like to know more about Engie Brasil Energia, we've spotted 3 warning signs, and 1 of them can't be ignored.

While Engie Brasil Energia isn't earning the highest return, check out this free list of companies that are 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.