Does Rede Energia Participações (BVMF:REDE3) Have The Makings Of A Multi-Bagger?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Rede Energia Participações (BVMF:REDE3) looks quite promising in regards to its trends of return on capital.

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. To calculate this metric for Rede Energia Participações, this is the formula:

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

0.10 = R$1.7b ÷ (R$21b - R$4.8b) (Based on the trailing twelve months to September 2020).

Thus, Rede Energia Participações has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 11% generated by the Electric Utilities industry.

View our latest analysis for Rede Energia Participações

Historical performance is a great place to start when researching a stock so above you can see the gauge for Rede Energia Participações' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Rede Energia Participações, check out these free graphs here.

How Are Returns Trending?

We like the trends that we're seeing from Rede Energia Participações. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 10%. The amount of capital employed has increased too, by 65%. 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.

In Conclusion...

To sum it up, Rede Energia Participações has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Rede Energia Participações can keep these trends up, it could have a bright future ahead.

One more thing, we've spotted 3 warning signs facing Rede Energia Participações that you might find interesting.

While Rede Energia Participações 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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