Returns On Capital Are Showing Encouraging Signs At Rede Energia Participações (BVMF:REDE3)

If you're looking for a multi-bagger, there's a few things to 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Rede Energia Participações (BVMF:REDE3) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Rede Energia Participações is:

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

0.12 = R$1.9b ÷ (R$22b - R$5.3b) (Based on the trailing twelve months to December 2020).

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

See 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.

What Does the ROCE Trend For Rede Energia Participações Tell Us?

Rede Energia Participações is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 12%. Basically the business is earning more per dollar of capital invested and in addition to that, 61% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

In Conclusion...

In summary, it's great to see that Rede Energia Participações can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 754% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you'd like to know about the risks facing Rede Energia Participações, we've discovered 4 warning signs that you should be aware of.

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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