Stock Analysis
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Ameren (NYSE:AEE) Will Want To Turn Around Its Return Trends
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. In light of that, when we looked at Ameren (NYSE:AEE) and its ROCE trend, we weren't exactly thrilled.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Ameren:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.049 = US$1.7b ÷ (US$38b - US$3.4b) (Based on the trailing twelve months to December 2022).
Therefore, Ameren has an ROCE of 4.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.0%.
Check out our latest analysis for Ameren
Above you can see how the current ROCE for Ameren 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.
The Trend Of ROCE
When we looked at the ROCE trend at Ameren, we didn't gain much confidence. Around five years ago the returns on capital were 6.3%, but since then they've fallen to 4.9%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
What We Can Learn From Ameren's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Ameren. And the stock has followed suit returning a meaningful 77% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.
One final note, you should learn about the 3 warning signs we've spotted with Ameren (including 1 which is significant) .
While Ameren 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.
What are the risks and opportunities for Ameren?
Ameren Corporation, together with its subsidiaries, operates as a public utility holding company in the United States.
Rewards
Earnings are forecast to grow 7.96% per year
Earnings have grown 10.9% per year over the past 5 years
Risks
Debt is not well covered by operating cash flow
Significant insider selling over the past 3 months
Further research on
Ameren
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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.
About NYSE:AEE
Ameren
Ameren Corporation, together with its subsidiaries, operates as a public utility holding company in the United States.
Average dividend payer with questionable track record.
