Returns At Light (BVMF:LIGT3) Appear To Be Weighed Down

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. Although, when we looked at Light (BVMF:LIGT3), it didn't seem to tick all of these boxes.

We've discovered 2 warning signs about Light. View them for free.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Light, this is the formula:

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

0.073 = R$1.5b ÷ (R$25b - R$5.0b) (Based on the trailing twelve months to December 2024).

Thus, Light has an ROCE of 7.3%. In absolute terms, that's a low return and it also under-performs the Electric Utilities industry average of 12%.

See our latest analysis for Light

In the above chart we have measured Light's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Light for free.

What The Trend Of ROCE Can Tell Us

Over the past five years, Light's ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if Light doesn't end up being a multi-bagger in a few years time.

What We Can Learn From Light's ROCE

We can conclude that in regards to Light's returns on capital employed and the trends, there isn't much change to report on. Since the stock has declined 53% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you'd like to know more about Light, we've spotted 2 warning signs, and 1 of them makes us a bit uncomfortable.

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.