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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Atlantica Sustainable Infrastructure (NASDAQ:AY), it didn't seem to tick all of these boxes.
Understanding 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 Atlantica Sustainable Infrastructure, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.034 = US$322m ÷ (US$9.9b - US$483m) (Based on the trailing twelve months to December 2020).
Thus, Atlantica Sustainable Infrastructure has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 4.6%.
Above you can see how the current ROCE for Atlantica Sustainable Infrastructure compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Atlantica Sustainable Infrastructure here for free.
What The Trend Of ROCE Can Tell Us
There hasn't been much to report for Atlantica Sustainable Infrastructure's returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at Atlantica Sustainable Infrastructure in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger. That being the case, it makes sense that Atlantica Sustainable Infrastructure has been paying out 262% of its earnings to its shareholders. These mature businesses typically have reliable earnings and not many places to reinvest them, so the next best option is to put the earnings into shareholders pockets.
One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 4.9% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.
What We Can Learn From Atlantica Sustainable Infrastructure's ROCE
In summary, Atlantica Sustainable Infrastructure isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Yet to long term shareholders the stock has gifted them an incredible 160% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
Atlantica Sustainable Infrastructure does have some risks, we noticed 6 warning signs (and 2 which are a bit unpleasant) we think you should know about.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
This article by Simply Wall St is general in nature. 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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