Returns At AGL Energy (ASX:AGL) Appear To Be Weighed Down

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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 AGL Energy (ASX:AGL), it didn't seem to tick all of these boxes.

Understanding 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. Analysts use this formula to calculate it for AGL Energy:

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).

So, 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 5.0%.

See our latest analysis for AGL Energy

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.

So How Is AGL Energy's ROCE Trending?

Over the past five years, AGL Energy's ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if AGL Energy doesn't end up being a multi-bagger in a few years time. That being the case, it makes sense that AGL Energy has been paying out 76% of its earnings to its shareholders. Most shareholders probably know this and own the stock for its dividend.

Our Take On AGL Energy's ROCE

We can conclude that in regards to AGL Energy's returns on capital employed and the trends, there isn't much change to report on. And in the last five years, the stock has given away 52% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

AGL Energy does have some risks though, and we've spotted 3 warning signs for AGL Energy that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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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