Capital Allocation Trends At Transmissora Aliança de Energia Elétrica (BVMF:TAEE11) Aren't Ideal

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. In light of that, when we looked at Transmissora Aliança de Energia Elétrica (BVMF:TAEE11) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

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 Transmissora Aliança de Energia Elétrica, this is the formula:

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

0.086 = R$1.5b ÷ (R$19b - R$1.6b) (Based on the trailing twelve months to September 2023).

Therefore, Transmissora Aliança de Energia Elétrica has an ROCE of 8.6%. Ultimately, that's a low return and it under-performs the Electric Utilities industry average of 12%.

Check out our latest analysis for Transmissora Aliança de Energia Elétrica

In the above chart we have measured Transmissora Aliança de Energia Elétrica's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Transmissora Aliança de Energia Elétrica here for free.

The Trend Of ROCE

On the surface, the trend of ROCE at Transmissora Aliança de Energia Elétrica doesn't inspire confidence. Over the last five years, returns on capital have decreased to 8.6% from 14% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Transmissora Aliança de Energia Elétrica's ROCE

To conclude, we've found that Transmissora Aliança de Energia Elétrica is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 157% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Transmissora Aliança de Energia Elétrica (of which 2 are a bit concerning!) that you should know about.

While Transmissora Aliança de Energia Elétrica 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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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.