The Trends At Equatorial Pará Distribuidora de Energia (BVMF:EQPA3) That You Should Know About

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 Pará Distribuidora de Energia's (BVMF:EQPA3) ROCE trend, we were pretty happy with 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. 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)

0.11 = R$1.1b ÷ (R$11b - R$1.5b) (Based on the trailing twelve months to March 2020).

Thus, Equatorial Pará Distribuidora de Energia has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Electric Utilities industry average of 9.7%.

View 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're interested in investigating Equatorial Pará Distribuidora de Energia's past further, check out this free graph of past earnings, revenue and cash flow.

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

While the current returns on capital are decent, they haven't changed much. The company has consistently earned 11% for the last five years, and the capital employed within the business has risen 121% in that time. 11% is a pretty standard return, and it provides some comfort knowing that Equatorial Pará Distribuidora de Energia has consistently earned this amount. 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.

On a side note, Equatorial Pará Distribuidora de Energia has done well to reduce current liabilities to 14% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

In Conclusion...

To sum it up, Equatorial Pará Distribuidora de Energia has simply been reinvesting capital steadily, at those decent rates of return. And the stock has done incredibly well with a 113% 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.

One more thing: We've identified 2 warning signs with Equatorial Pará Distribuidora de Energia (at least 1 which makes us a bit uncomfortable) , and understanding them would certainly be useful.

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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