Is Atlantica Sustainable Infrastructure (NASDAQ:AY) Likely To Turn Things Around?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Atlantica Sustainable Infrastructure (NASDAQ:AY) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. 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$322m ÷ (US$9.9b - US$483m) (Based on the trailing twelve months to December 2020).

Therefore, 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 4.6%.

See 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.

How Are Returns Trending?

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. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at Atlantica Sustainable Infrastructure in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger. That probably explains why Atlantica Sustainable Infrastructure has been paying out 262% of its earnings as dividends to shareholders. Most shareholders probably know this and own the stock for its dividend.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 4.9% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

The Bottom Line

In summary, Atlantica Sustainable Infrastructure isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Yet to long term shareholders the stock has gifted them an incredible 160% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Atlantica Sustainable Infrastructure does come with some risks though, we found 6 warning signs in our investment analysis, and 2 of those make us uncomfortable...

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. 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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