Returns On Capital At Atlantica Sustainable Infrastructure (NASDAQ:AY) Paint A Concerning Picture

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at Atlantica Sustainable Infrastructure (NASDAQ:AY), so let's see why.

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

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

0.028 = US$238m ÷ (US$9.1b - US$546m) (Based on the trailing twelve months to March 2023).

Thus, Atlantica Sustainable Infrastructure has an ROCE of 2.8%. In absolute terms, that's a low return but it's around the Renewable Energy industry average of 2.4%.

Check out 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.

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

We are a bit worried about the trend of returns on capital at Atlantica Sustainable Infrastructure. To be more specific, the ROCE was 4.2% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Atlantica Sustainable Infrastructure to turn into a multi-bagger.

The Bottom Line

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Yet despite these concerning fundamentals, the stock has performed strongly with a 77% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you'd like to know about the risks facing Atlantica Sustainable Infrastructure, we've discovered 1 warning sign that 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.