The Trend Of High Returns At Rede Energia Participações (BVMF:REDE3) Has Us Very Interested

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Rede Energia Participações' (BVMF:REDE3) returns on capital, so let's have a look.

Understanding 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. Analysts use this formula to calculate it for Rede Energia Participações:

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

0.20 = R$3.9b ÷ (R$26b - R$6.6b) (Based on the trailing twelve months to September 2023).

Therefore, Rede Energia Participações has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 12% earned by companies in a similar industry.

Check out 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.

The Trend Of ROCE

The trends we've noticed at Rede Energia Participações are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 20%. The amount of capital employed has increased too, by 56%. So we're very much inspired by what we're seeing at Rede Energia Participações thanks to its ability to profitably reinvest capital.

Our Take On Rede Energia Participações' ROCE

All in all, it's terrific to see that Rede Energia Participações is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a solid 41% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to continue researching Rede Energia Participações, you might be interested to know about the 2 warning signs that our analysis has discovered.

Rede Energia Participações is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.