Equatorial Maranhão Distribuidora de Energia (BVMF:EQMA3B) Has Some Way To Go To Become A Multi-Bagger

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. That's why when we briefly looked at Equatorial Maranhão Distribuidora de Energia's (BVMF:EQMA3B) ROCE trend, we were pretty happy with what we saw.

Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Equatorial Maranhão Distribuidora de Energia:

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

0.13 = R$1.1b ÷ (R$11b - R$2.5b) (Based on the trailing twelve months to December 2024).

Therefore, Equatorial Maranhão Distribuidora de Energia has an ROCE of 13%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Electric Utilities industry average of 12%.

See our latest analysis for Equatorial Maranhão Distribuidora de Energia

Historical performance is a great place to start when researching a stock so above you can see the gauge for Equatorial Maranhão Distribuidora de Energia's ROCE against it's prior returns. If you're interested in investigating Equatorial Maranhão Distribuidora de Energia's past further, check out this free graph covering Equatorial Maranhão Distribuidora de Energia's past earnings, revenue and cash flow.

What Can We Tell From Equatorial Maranhão Distribuidora de Energia's ROCE Trend?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 44% more capital in the last five years, and the returns on that capital have remained stable at 13%. Since 13% 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 Bottom Line

The main thing to remember is that Equatorial Maranhão Distribuidora de Energia has proven its ability to continually reinvest at respectable rates of return. Yet over the last three years the stock has declined 11%, so the decline might provide an opening. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Equatorial Maranhão Distribuidora de Energia (of which 1 is concerning!) that you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.