The 22% Return On Capital At Rio Paranapanema Energia (BVMF:GEPA3) Got Our Attention

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. So when we looked at the ROCE trend of Rio Paranapanema Energia (BVMF:GEPA3) we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Rio Paranapanema Energia:

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

0.22 = R$557m ÷ (R$4.3b - R$1.7b) (Based on the trailing twelve months to September 2020).

So, Rio Paranapanema Energia has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Electric Utilities industry average of 11%.

See 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're interested in investigating Rio Paranapanema Energia's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We're pretty happy with how the ROCE has been trending at Rio Paranapanema Energia. The data shows that returns on capital have increased by 118% over the trailing five years. The company is now earning R$0.2 per dollar of capital employed. In regards to capital employed, Rio Paranapanema Energia appears to been achieving more with less, since the business is using 28% 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.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 40% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

Our Take On Rio Paranapanema Energia's ROCE

In a nutshell, we're pleased to see that Rio Paranapanema Energia has been able to generate higher returns from less capital. Since the stock has returned a solid 41% to shareholders over the last three years, it's fair to say investors are beginning to recognize these changes. 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.

On a separate note, we've found 2 warning signs for Rio Paranapanema Energia you'll probably want to know about.

Rio Paranapanema Energia is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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