Returns On Capital At Engie Brasil Energia (BVMF:EGIE3) Have Hit The Brakes

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So, when we ran our eye over Engie Brasil Energia's (BVMF:EGIE3) trend of ROCE, we liked 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)

0.17 = R$5.6b ÷ (R$38b - R$5.7b) (Based on the trailing twelve months to June 2021).

So, Engie Brasil Energia has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 7.5% generated by the Renewable Energy industry.

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, you can check out the forecasts from the analysts covering Engie Brasil Energia here for free.

How Are Returns Trending?

While the returns on capital are good, they haven't moved much. The company has consistently earned 17% for the last five years, and the capital employed within the business has risen 158% in that time. Since 17% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. 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 76% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

If you want to know some of the risks facing Engie Brasil Energia we've found 2 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

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.

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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