There Are Reasons To Feel Uneasy About Ameresco's (NYSE:AMRC) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Ameresco (NYSE:AMRC), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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 Ameresco, this is the formula:

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

0.039 = US$90m ÷ (US$3.0b - US$752m) (Based on the trailing twelve months to June 2023).

Therefore, Ameresco has an ROCE of 3.9%. Ultimately, that's a low return and it under-performs the Construction industry average of 12%.

View our latest analysis for Ameresco

In the above chart we have measured Ameresco'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 Ameresco.

So How Is Ameresco's ROCE Trending?

In terms of Ameresco's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 5.9% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From Ameresco's ROCE

In summary, we're somewhat concerned by Ameresco's diminishing returns on increasing amounts of capital. Yet despite these poor fundamentals, the stock has gained a huge 257% over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a separate note, we've found 2 warning signs for Ameresco you'll probably want to know about.

While Ameresco 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.

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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.