Investors Will Want Equatorial Maranhão Distribuidora de Energia's (BVMF:EQMA3B) Growth In ROCE To Persist

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. So when we looked at Equatorial Maranhão Distribuidora de Energia (BVMF:EQMA3B) and its trend of ROCE, we really liked what we saw.

Understanding 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 Equatorial Maranhão Distribuidora de Energia, this is the formula:

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

0.18 = R$1.1b ÷ (R$7.4b - R$1.2b) (Based on the trailing twelve months to June 2021).

Therefore, Equatorial Maranhão Distribuidora de Energia has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Electric Utilities industry average of 12% it's much better.

View 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'd like to look at how Equatorial Maranhão Distribuidora de Energia has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Equatorial Maranhão Distribuidora de Energia is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 18%. Basically the business is earning more per dollar of capital invested and in addition to that, 45% 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.

The Bottom Line

All in all, it's terrific to see that Equatorial Maranhão Distribuidora de Energia is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 225% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing to note, we've identified 2 warning signs with Equatorial Maranhão Distribuidora de Energia and understanding them should be part of your investment process.

While Equatorial Maranhão Distribuidora de 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.
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