Atlantica Sustainable Infrastructure's (NASDAQ:AY) Returns Have Hit A Wall

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Atlantica Sustainable Infrastructure (NASDAQ:AY) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Atlantica Sustainable Infrastructure, this is the formula:

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

0.04 = US$368m ÷ (US$10b - US$901m) (Based on the trailing twelve months to June 2021).

Therefore, Atlantica Sustainable Infrastructure has an ROCE of 4.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.5%.

Check out our latest analysis for Atlantica Sustainable Infrastructure

Above you can see how the current ROCE for Atlantica Sustainable Infrastructure compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Atlantica Sustainable Infrastructure's ROCE Trend?

Things have been pretty stable at Atlantica Sustainable Infrastructure, with its capital employed and returns on that capital staying somewhat the same for the last five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Atlantica Sustainable Infrastructure doesn't end up being a multi-bagger in a few years time. That probably explains why Atlantica Sustainable Infrastructure has been paying out 189% of its earnings as dividends to shareholders. Most shareholders probably know this and own the stock for its dividend.

On a side note, Atlantica Sustainable Infrastructure has done well to reduce current liabilities to 8.9% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line On Atlantica Sustainable Infrastructure's ROCE

We can conclude that in regards to Atlantica Sustainable Infrastructure's returns on capital employed and the trends, there isn't much change to report on. Yet to long term shareholders the stock has gifted them an incredible 175% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Atlantica Sustainable Infrastructure does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are a bit concerning...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.
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