Returns Are Gaining Momentum At EDP - Energias do Brasil (BVMF:ENBR3)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at EDP - Energias do Brasil (BVMF:ENBR3) so let's look a bit deeper.

Return On Capital Employed (ROCE): What is it?

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 EDP - Energias do Brasil:

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

0.14 = R$3.3b ÷ (R$32b - R$7.3b) (Based on the trailing twelve months to June 2021).

Therefore, EDP - Energias do Brasil has an ROCE of 14%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Electric Utilities industry average of 13%.

See our latest analysis for EDP - Energias do Brasil

Above you can see how the current ROCE for EDP - Energias do Brasil 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 report on analyst forecasts for the company.

What Can We Tell From EDP - Energias do Brasil's ROCE Trend?

We like the trends that we're seeing from EDP - Energias do Brasil. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 14%. Basically the business is earning more per dollar of capital invested and in addition to that, 52% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

Our Take On EDP - Energias do Brasil's ROCE

In summary, it's great to see that EDP - Energias do Brasil can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 47% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a separate note, we've found 2 warning signs for EDP - Energias do Brasil you'll probably want to know about.

While EDP - Energias do Brasil 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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