Here's What To Make Of Equatorial Pará Distribuidora de Energia's (BVMF:EQPA3) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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 ran our eye over Equatorial Pará Distribuidora de Energia's (BVMF:EQPA3) trend of ROCE, we liked what we saw.

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. To calculate this metric for Equatorial Pará Distribuidora de Energia, this is the formula:

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

0.11 = R$1.2b ÷ (R$12b - R$2.0b) (Based on the trailing twelve months to September 2020).

Thus, Equatorial Pará Distribuidora de Energia has an ROCE of 11%. By itself that's a normal return on capital and it's in line with the industry's average returns of 11%.

See our latest analysis for Equatorial Pará Distribuidora de Energia

Historical performance is a great place to start when researching a stock so above you can see the gauge for Equatorial Pará Distribuidora de Energia's ROCE against it's prior returns. 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.

How Are Returns Trending?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 119% more capital in the last five years, and the returns on that capital have remained stable at 11%. 11% is a pretty standard return, and it provides some comfort knowing that Equatorial Pará Distribuidora de Energia has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On a side note, Equatorial Pará Distribuidora de Energia has done well to reduce current liabilities to 16% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

The Key Takeaway

In the end, Equatorial Pará Distribuidora de Energia has proven its ability to adequately reinvest capital at good rates of return. And the stock has done incredibly well with a 118% return over the last five years, so long term investors are no doubt ecstatic with that result. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

If you'd like to know about the risks facing Equatorial Pará Distribuidora de Energia, we've discovered 1 warning sign that you should be aware of.

While Equatorial Pará 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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