Investors Will Want Rio Paranapanema Energia's (BVMF:GEPA3) Growth In ROCE To Persist

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. So on that note, Rio Paranapanema Energia (BVMF:GEPA3) looks quite promising in regards to its trends of return on capital.

What Is 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. To calculate this metric for Rio Paranapanema Energia, this is the formula:

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

0.19 = R$449m ÷ (R$3.2b - R$917m) (Based on the trailing twelve months to June 2024).

So, Rio Paranapanema Energia has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Electric Utilities industry average of 13% it's much better.

See our latest analysis for Rio Paranapanema 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 Rio Paranapanema Energia has performed in the past in other metrics, you can view this free graph of Rio Paranapanema Energia's past earnings, revenue and cash flow.

So How Is Rio Paranapanema Energia's ROCE Trending?

Rio Paranapanema Energia has not disappointed in regards to ROCE growth. The figures show that over the last five years, returns on capital have grown by 23%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, Rio Paranapanema Energia appears to been achieving more with less, since the business is using 32% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

The Bottom Line On Rio Paranapanema Energia's ROCE

In the end, Rio Paranapanema Energia has proven it's capital allocation skills are good with those higher returns from less amount of capital. Since the stock has only returned 6.0% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

Rio Paranapanema Energia does have some risks, we noticed 3 warning signs (and 1 which makes us a bit uncomfortable) we think 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.

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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.