Some Investors May Be Worried About Transmissora Aliança de Energia Elétrica's (BVMF:TAEE11) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Transmissora Aliança de Energia Elétrica (BVMF:TAEE11), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Transmissora Aliança de Energia Elétrica is:

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

0.081 = R$1.4b ÷ (R$19b - R$1.2b) (Based on the trailing twelve months to June 2023).

Thus, Transmissora Aliança de Energia Elétrica has an ROCE of 8.1%. Ultimately, that's a low return and it under-performs the Electric Utilities industry average of 13%.

See 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.

So How Is Transmissora Aliança de Energia Elétrica's ROCE Trending?

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 8.1% from 12% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line On Transmissora Aliança de Energia Elétrica's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Transmissora Aliança de Energia Elétrica have fallen, meanwhile the business is employing more capital than it was five years ago. Yet despite these poor fundamentals, the stock has gained a huge 195% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Transmissora Aliança de Energia Elétrica (including 2 which are significant) .

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.