Rio Paranapanema Energia (BVMF:GEPA3) Might Have The Makings Of A Multi-Bagger

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. With that in mind, we've noticed some promising trends at Rio Paranapanema Energia (BVMF:GEPA3) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed 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$505m ÷ (R$3.7b - R$1.0b) (Based on the trailing twelve months to December 2022).

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.

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.

SWOT Analysis for Rio Paranapanema Energia

So How Is Rio Paranapanema Energia's ROCE Trending?

Rio Paranapanema Energia's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 44% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

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. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Rio Paranapanema Energia does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are a bit concerning...

While Rio Paranapanema Energia isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.