Capital Allocation Trends At Atlantica Sustainable Infrastructure (NASDAQ:AY) Aren't Ideal

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Basically the company is earning less on its investments and it is also reducing its total assets. And from a first read, things don't look too good at Atlantica Sustainable Infrastructure (NASDAQ:AY), so let's see why.

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 Atlantica Sustainable Infrastructure, this is the formula:

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

0.034 = US$311m ÷ (US$10b - US$890m) (Based on the trailing twelve months to September 2021).

Thus, Atlantica Sustainable Infrastructure has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 4.4%.

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'd like to see what analysts are forecasting going forward, you should check out our free report for Atlantica Sustainable Infrastructure.

The Trend Of ROCE

There is reason to be cautious about Atlantica Sustainable Infrastructure, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 4.3% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Atlantica Sustainable Infrastructure becoming one if things continue as they have.

On a related note, Atlantica Sustainable Infrastructure has decreased its current liabilities to 8.9% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Atlantica Sustainable Infrastructure's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 186%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Atlantica Sustainable Infrastructure (of which 1 is a bit unpleasant!) that you should know about.

While Atlantica Sustainable Infrastructure 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.