Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after glancing at the trends within Atlantica Sustainable Infrastructure (NASDAQ:AY), we weren't too hopeful.
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. To calculate this metric for Atlantica Sustainable Infrastructure, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.027 = US$234m ÷ (US$9.1b - US$570m) (Based on the trailing twelve months to September 2022).
Thus, Atlantica Sustainable Infrastructure has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 4.1%.
In the above chart we have measured Atlantica Sustainable Infrastructure's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Atlantica Sustainable Infrastructure.
So How Is Atlantica Sustainable Infrastructure's ROCE Trending?
In terms of Atlantica Sustainable Infrastructure's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 3.7%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Atlantica Sustainable Infrastructure to turn into a multi-bagger.
The Bottom Line
In summary, it's unfortunate that Atlantica Sustainable Infrastructure is generating lower returns from the same amount of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 74% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
Atlantica Sustainable Infrastructure does have some risks though, and we've spotted 2 warning signs for Atlantica Sustainable Infrastructure that you might be interested in.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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.
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