Acuity Brands' (NYSE:AYI) Returns Have Hit A Wall

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. That's why when we briefly looked at Acuity Brands' (NYSE:AYI) ROCE trend, we were pretty happy with what we saw.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Acuity Brands, this is the formula:

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

0.18 = US$553m ÷ (US$3.8b - US$688m) (Based on the trailing twelve months to August 2024).

So, Acuity Brands has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 12% it's much better.

See our latest analysis for Acuity Brands

Above you can see how the current ROCE for Acuity Brands 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 Acuity Brands for free.

What Does the ROCE Trend For Acuity Brands Tell Us?

While the returns on capital are good, they haven't moved much. The company has employed 21% more capital in the last five years, and the returns on that capital have remained stable at 18%. Since 18% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

What We Can Learn From Acuity Brands' ROCE

The main thing to remember is that Acuity Brands has proven its ability to continually reinvest at respectable rates of return. And the stock has done incredibly well with a 138% return over the last five years, so long term investors are no doubt ecstatic with that result. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

If you're still interested in Acuity Brands it's worth checking out our FREE intrinsic value approximation for AYI to see if it's trading at an attractive price in other respects.

While Acuity Brands 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. 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.