Capital Allocation Trends At AusNet Services (ASX:AST) Aren't Ideal

By
Simply Wall St
Published
May 31, 2021
ASX:AST
Source: Shutterstock

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating AusNet Services (ASX:AST), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for AusNet Services, this is the formula:

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

0.053 = AU$736m ÷ (AU$15b - AU$763m) (Based on the trailing twelve months to March 2021).

So, AusNet Services has an ROCE of 5.3%. On its own, that's a low figure but it's around the 5.7% average generated by the Electric Utilities industry.

View our latest analysis for AusNet Services

roce
ASX:AST Return on Capital Employed May 31st 2021

In the above chart we have measured AusNet Services' 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 AusNet Services here for free.

The Trend Of ROCE

When we looked at the ROCE trend at AusNet Services, we didn't gain much confidence. Around five years ago the returns on capital were 7.3%, but since then they've fallen to 5.3%. However it looks like AusNet Services might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

To conclude, we've found that AusNet Services is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 48% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

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

While AusNet Services isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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