Engie Brasil Energia (BVMF:EGIE3) Hasn't Managed To Accelerate Its Returns

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. That's why when we briefly looked at Engie Brasil Energia's (BVMF:EGIE3) ROCE trend, we were pretty happy with what we saw.

What Is Return On Capital Employed (ROCE)?

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 Engie Brasil Energia, this is the formula:

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

0.16 = R$5.4b ÷ (R$39b - R$5.8b) (Based on the trailing twelve months to September 2023).

So, Engie Brasil Energia has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Renewable Energy industry average of 5.3% it's much better.

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

What Does the ROCE Trend For Engie Brasil Energia Tell Us?

While the returns on capital are good, they haven't moved much. The company has consistently earned 16% for the last five years, and the capital employed within the business has risen 72% in that time. 16% is a pretty standard return, and it provides some comfort knowing that Engie Brasil Energia has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

The Bottom Line On Engie Brasil Energia's ROCE

In the end, Engie Brasil Energia has proven its ability to adequately reinvest capital at good rates of return. And the stock has followed suit returning a meaningful 66% to shareholders over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Engie Brasil Energia (of which 1 doesn't sit too well with us!) that you should know about.

While Engie Brasil 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.