Here's What's Concerning About Altus Power's (NYSE:AMPS) 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? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Altus Power (NYSE:AMPS), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What is it?
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. Analysts use this formula to calculate it for Altus Power:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.017 = US$19m ÷ (US$1.1b - US$31m) (Based on the trailing twelve months to March 2022).
Therefore, Altus Power has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 3.7%.
See our latest analysis for Altus Power
In the above chart we have measured Altus Power'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.
The Trend Of ROCE
Unfortunately, the trend isn't great with ROCE falling from 3.6% two years ago, while capital employed has grown 182%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Altus Power might not have received a full period of earnings contribution from it.
The Bottom Line On Altus Power's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Altus Power. These growth trends haven't led to growth returns though, since the stock has fallen 26% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
One more thing: We've identified 4 warning signs with Altus Power (at least 3 which are a bit concerning) , and understanding these would certainly be useful.
While Altus Power may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
