Transmissora Aliança de Energia Elétrica (BVMF:TAEE11) Is Experiencing Growth In Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Transmissora Aliança de Energia Elétrica (BVMF:TAEE11) and its trend of ROCE, we really liked what we saw.

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. 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)

0.16 = R$2.6b ÷ (R$18b - R$1.3b) (Based on the trailing twelve months to June 2022).

Therefore, Transmissora Aliança de Energia Elétrica has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Electric Utilities industry average of 13% it's much better.

View 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

Investors would be pleased with what's happening at Transmissora Aliança de Energia Elétrica. Over the last five years, returns on capital employed have risen substantially to 16%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 135%. So we're very much inspired by what we're seeing at Transmissora Aliança de Energia Elétrica thanks to its ability to profitably reinvest capital.

The Bottom Line

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Transmissora Aliança de Energia Elétrica has. Since the stock has returned a staggering 204% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Transmissora Aliança de Energia Elétrica (of which 1 can't be ignored!) 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.