Returns on Capital Paint A Bright Future For AGL Energy (ASX:AGL)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. And in light of that, the trends we're seeing at AGL Energy's (ASX:AGL) look very promising so lets take a look.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for AGL Energy, this is the formula:

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

0.22 = AU$2.7b ÷ (AU$15b - AU$3.2b) (Based on the trailing twelve months to December 2021).

Thus, AGL Energy has an ROCE of 22%. That's a fantastic return and not only that, it outpaces the average of 5.2% earned by companies in a similar industry.

See our latest analysis for AGL Energy

Above you can see how the current ROCE for AGL Energy compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering AGL Energy here for free.

What Can We Tell From AGL Energy's ROCE Trend?

AGL Energy's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 98% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

Our Take On AGL Energy's ROCE

To sum it up, AGL Energy is collecting higher returns from the same amount of capital, and that's impressive. And since the stock has fallen 60% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a final note, we found 6 warning signs for AGL Energy (1 is a bit unpleasant) you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.