Returns On Capital - An Important Metric For Companhia CELG de Participações S/A (BVMF:GPAR3)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Companhia CELG de Participações S/A (BVMF:GPAR3) and its trend of ROCE, we really liked what we saw.

What is Return On Capital Employed (ROCE)?

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 Companhia CELG de Participações S/A, this is the formula:

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

0.052 = R$76m ÷ (R$1.5b - R$46m) (Based on the trailing twelve months to June 2020).

Thus, Companhia CELG de Participações S/A has an ROCE of 5.2%. Ultimately, that's a low return and it under-performs the Electric Utilities industry average of 11%.

View our latest analysis for Companhia CELG de Participações S/A

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 Companhia CELG de Participações S/A's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 5.2%. Basically the business is earning more per dollar of capital invested and in addition to that, 205% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a related note, the company's ratio of current liabilities to total assets has decreased to 3.1%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Companhia CELG de Participações S/A has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

Our Take On Companhia CELG de Participações S/A's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Companhia CELG de Participações S/A has. Since the stock has returned a staggering 641% to shareholders over the last five years, it looks like investors are recognizing 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.

One more thing: We've identified 2 warning signs with Companhia CELG de Participações S/A (at least 1 which is a bit unpleasant) , and understanding them would certainly be useful.

While Companhia CELG de Participações S/A 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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