Return Trends At Engie Brasil Energia (BVMF:EGIE3) Aren't Appealing

Did you know there are some financial metrics that can provide clues of a potential 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. 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.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Engie Brasil Energia is:

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

0.18 = R$6.0b ÷ (R$40b - R$5.6b) (Based on the trailing twelve months to June 2022).

Thus, Engie Brasil Energia has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Renewable Energy industry average of 3.4% it's much better.

View our latest analysis for Engie Brasil Energia

In the above chart we have measured Engie Brasil 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 report for Engie Brasil Energia.

How Are Returns Trending?

While the current returns on capital are decent, they haven't changed much. The company has consistently earned 18% for the last five years, and the capital employed within the business has risen 158% in that time. 18% 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 Key Takeaway

The main thing to remember is that Engie Brasil Energia has proven its ability to continually reinvest at respectable rates of return. And the stock has followed suit returning a meaningful 88% 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.

One more thing: We've identified 3 warning signs with Engie Brasil Energia (at least 2 which are a bit concerning) , and understanding them would certainly be useful.

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.