Equatorial Pará Distribuidora de Energia (BVMF:EQPA3) Could Become A Multi-Bagger

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So when we looked at the ROCE trend of Equatorial Pará Distribuidora de Energia (BVMF:EQPA3) we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Equatorial Pará Distribuidora de Energia:

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

0.22 = R$2.0b ÷ (R$12b - R$2.7b) (Based on the trailing twelve months to March 2022).

So, Equatorial Pará Distribuidora de Energia has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Electric Utilities industry average of 14%.

See our latest analysis for Equatorial Pará Distribuidora de Energia

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Equatorial Pará Distribuidora de Energia has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Equatorial Pará Distribuidora de Energia's ROCE Trending?

We like the trends that we're seeing from Equatorial Pará Distribuidora de Energia. The data shows that returns on capital have increased substantially over the last five years to 22%. The amount of capital employed has increased too, by 59%. 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

To sum it up, Equatorial Pará Distribuidora de Energia has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing: We've identified 4 warning signs with Equatorial Pará Distribuidora de Energia (at least 1 which is potentially serious) , and understanding these would certainly be useful.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.