Here's What's Concerning About Atlantica Sustainable Infrastructure's (NASDAQ:AY) Returns On Capital
When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. And from a first read, things don't look too good at Atlantica Sustainable Infrastructure (NASDAQ:AY), so let's see why.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Atlantica Sustainable Infrastructure is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.027 = US$235m ÷ (US$9.1b - US$546m) (Based on the trailing twelve months to March 2023).
So, Atlantica Sustainable Infrastructure has an ROCE of 2.7%. On its own that's a low return, but compared to the average of 1.9% generated by the Renewable Energy industry, it's much better.
View our latest analysis for Atlantica Sustainable Infrastructure
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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
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 4.2%, 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. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Atlantica Sustainable Infrastructure to turn into a multi-bagger.
What We Can Learn From Atlantica Sustainable Infrastructure's ROCE
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 52% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
If you want to continue researching Atlantica Sustainable Infrastructure, you might be interested to know about the 1 warning sign that our analysis has discovered.
While Atlantica Sustainable Infrastructure 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.
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