Neoenergia (BVMF:NEOE3) Has More To Do To Multiply In Value Going Forward

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. That's why when we briefly looked at Neoenergia's (BVMF:NEOE3) ROCE trend, we were pretty happy with what we saw.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Neoenergia, this is the formula:

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

0.11 = R$7.0b ÷ (R$75b - R$13b) (Based on the trailing twelve months to June 2021).

Therefore, Neoenergia has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Electric Utilities industry average of 12%.

Check out our latest analysis for Neoenergia

Above you can see how the current ROCE for Neoenergia compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Neoenergia.

What Can We Tell From Neoenergia's ROCE Trend?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 214% more capital in the last five years, and the returns on that capital have remained stable at 11%. Since 11% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

The Bottom Line On Neoenergia's ROCE

The main thing to remember is that Neoenergia has proven its ability to continually reinvest at respectable rates of return. However, despite the favorable fundamentals, the stock has fallen 17% over the last year, so there might be an opportunity here for astute investors. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.

On a final note, we found 2 warning signs for Neoenergia (1 is significant) you should be aware of.

While Neoenergia 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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