These Return Metrics Don't Make Atlantica Sustainable Infrastructure (NASDAQ:AY) Look Too Strong
If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. On that note, looking into Atlantica Sustainable Infrastructure (NASDAQ:AY), we weren't too upbeat about how things were going.
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. 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)
0.032 = US$267m ÷ (US$8.9b - US$619m) (Based on the trailing twelve months to September 2023).
Thus, Atlantica Sustainable Infrastructure has an ROCE of 3.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 3.2%.
View our latest analysis for Atlantica Sustainable Infrastructure
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.
The Trend Of ROCE
We are a bit worried about the trend of returns on capital at Atlantica Sustainable Infrastructure. To be more specific, the ROCE was 4.6% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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.
The Bottom Line On Atlantica Sustainable Infrastructure's ROCE
In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Investors must expect better things on the horizon though because the stock has risen 38% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.
If you'd like to know more about Atlantica Sustainable Infrastructure, we've spotted 3 warning signs, and 1 of them shouldn't be ignored.
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.
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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.
