Rio Paranapanema Energia (BVMF:GEPA3) Is Achieving High Returns On Its Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at the ROCE trend of Rio Paranapanema Energia (BVMF:GEPA3) 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. 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)

0.49 = R$1.3b ÷ (R$5.7b - R$3.0b) (Based on the trailing twelve months to December 2020).

Therefore, Rio Paranapanema Energia has an ROCE of 49%. In absolute terms that's a great return and it's even better than the Electric Utilities industry average of 11%.

View our latest analysis for Rio Paranapanema Energia

Historical performance is a great place to start when researching a stock so above you can see the gauge for Rio Paranapanema Energia's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Rio Paranapanema Energia, check out these free graphs here.

What Can We Tell From Rio Paranapanema Energia's ROCE Trend?

Rio Paranapanema Energia's ROCE growth is quite impressive. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 258% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 52% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

What We Can Learn From Rio Paranapanema Energia's ROCE

In summary, we're delighted to see that Rio Paranapanema Energia has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with a respectable 61% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing to note, we've identified 2 warning signs with Rio Paranapanema Energia and understanding these should be part of your investment process.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. 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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