Should We Be Excited About The Trends Of Returns At Neoenergia (BVMF:NEOE3)?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Neoenergia (BVMF:NEOE3) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

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. The formula for this calculation on Neoenergia is:

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

0.087 = R$4.2b ÷ (R$61b - R$12b) (Based on the trailing twelve months to June 2020).

Therefore, Neoenergia has an ROCE of 8.7%. In absolute terms, that's a low return but it's around the Electric Utilities industry average of 9.9%.

See our latest analysis for Neoenergia

In the above chart we have measured Neoenergia's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

The returns on capital haven't changed much for Neoenergia in recent years. Over the past five years, ROCE has remained relatively flat at around 8.7% and the business has deployed 155% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line On Neoenergia's ROCE

As we've seen above, Neoenergia's returns on capital haven't increased but it is reinvesting in the business. Additionally, the stock's total return to shareholders over the last year has been flat, which isn't too surprising. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a final note, we found 2 warning signs for Neoenergia (1 doesn't sit too well with us) 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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