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Return Trends At AGL Energy (ASX:AGL) Aren't Appealing

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·3 min read
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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think AGL Energy (ASX:AGL) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on AGL Energy is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.085 = AU$1.0b ÷ (AU$15b - AU$3.1b) (Based on the trailing twelve months to December 2020).

Therefore, AGL Energy has an ROCE of 8.5%. In absolute terms, that's a low return, but it's much better than the Integrated Utilities industry average of 4.8%.

See our latest analysis for AGL Energy

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In the above chart we have measured AGL Energy's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering AGL Energy here for free.

What The Trend Of ROCE Can Tell Us

Things have been pretty stable at AGL Energy, with its capital employed and returns on that capital staying somewhat the same for the last 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 AGL Energy in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger. That probably explains why AGL Energy has been paying out 81% of its earnings as dividends to shareholders. If the company is in fact lacking growth opportunities, that's one of the viable alternatives for the money.

The Bottom Line On AGL Energy's ROCE

In a nutshell, AGL Energy has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has declined 42% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think AGL Energy has the makings of a multi-bagger.

AGL Energy does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

While AGL Energy 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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.