Stock Analysis

Does Centrus Energy (NYSEMKT:LEU) Have The DNA Of A Multi-Bagger?

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NYSEAM:LEU
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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. And in light of that, the trends we're seeing at Centrus Energy's (NYSEMKT:LEU) look very promising so lets take a look.

Understanding 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. The formula for this calculation on Centrus Energy is:

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

0.23 = US$35m ÷ (US$468m - US$316m) (Based on the trailing twelve months to September 2020).

So, Centrus Energy has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Oil and Gas industry average of 8.8%.

See our latest analysis for Centrus Energy

roce
AMEX:LEU Return on Capital Employed December 30th 2020

Above you can see how the current ROCE for Centrus 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 Centrus Energy here for free.

The Trend Of ROCE

It's great to see that Centrus Energy has started to generate some pre-tax earnings from prior investments. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 23% on their capital employed. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 76%. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 67% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

What We Can Learn From Centrus Energy's ROCE

In the end, Centrus Energy has proven it's capital allocation skills are good with those higher returns from less amount of capital. And a remarkable 1,720% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Centrus Energy can keep these trends up, it could have a bright future ahead.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Centrus Energy (of which 1 doesn't sit too well with us!) that you should know about.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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What are the risks and opportunities for Centrus Energy?

Centrus Energy Corp. supplies nuclear fuel and services for the nuclear power industry in the United States, Japan, Belgium, and internationally.

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Rewards

  • Trading at 62.3% below our estimate of its fair value

  • Revenue is forecast to grow 10.67% per year

  • Earnings grew by 387.8% over the past year

Risks

  • Earnings are forecast to decline by an average of 11.9% per year for the next 3 years

  • Debt is not well covered by operating cash flow

  • Negative shareholders equity

  • Shareholders have been diluted in the past year

  • Significant insider selling over the past 3 months

  • Volatile share price over the past 3 months

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