Atlantica Sustainable Infrastructure (NASDAQ:AY) May Have Issues Allocating Its Capital

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at Atlantica Sustainable Infrastructure (NASDAQ:AY), we've spotted some signs that it could be struggling, so let's investigate.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Atlantica Sustainable Infrastructure is:

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

0.031 = US$257m ÷ (US$8.9b - US$532m) (Based on the trailing twelve months to June 2023).

Thus, Atlantica Sustainable Infrastructure has an ROCE of 3.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 2.9%.

View our latest analysis for Atlantica Sustainable Infrastructure

In the above chart we have measured Atlantica Sustainable Infrastructure'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 Atlantica Sustainable Infrastructure.

So How Is Atlantica Sustainable Infrastructure's ROCE Trending?

We are a bit worried about the trend of returns on capital at Atlantica Sustainable Infrastructure. About five years ago, returns on capital were 4.3%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Atlantica Sustainable Infrastructure to turn into a multi-bagger.

The Key Takeaway

In summary, it's unfortunate that Atlantica Sustainable Infrastructure is generating lower returns from the same amount of capital. However the stock has delivered a 47% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a final note, we found 3 warning signs for Atlantica Sustainable Infrastructure (1 is concerning) you should be aware of.

While Atlantica Sustainable Infrastructure 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.