Slowing Rates Of Return At Acuity Brands (NYSE:AYI) Leave Little Room For Excitement

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. With that in mind, the ROCE of Acuity Brands (NYSE:AYI) looks decent, right now, so lets see what the trend of returns can tell us.

What Is 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 Acuity Brands:

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

0.19 = US$521m ÷ (US$3.4b - US$596m) (Based on the trailing twelve months to February 2023).

Therefore, Acuity Brands has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 11% generated by the Electrical industry.

View 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 here for free.

SWOT Analysis for Acuity Brands

What Can We Tell From Acuity Brands' ROCE Trend?

While the current returns on capital are decent, they haven't changed much. The company has consistently earned 19% for the last five years, and the capital employed within the business has risen 24% in that time. 19% is a pretty standard return, and it provides some comfort knowing that Acuity Brands has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

What We Can Learn From Acuity Brands' ROCE

In the end, Acuity Brands has proven its ability to adequately reinvest capital at good rates of return. In light of this, the stock has only gained 36% over the last five years for shareholders who have owned the stock in this period. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.

Acuity Brands could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

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.