What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Ameren (NYSE:AEE) 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)
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)
0.045 = US$1.5b ÷ (US$36b - US$3.1b) (Based on the trailing twelve months to March 2022).
So, Ameren has an ROCE of 4.5%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.7%.
See our latest analysis for Ameren
In the above chart we have measured Ameren's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Ameren here for free.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Ameren doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.5% from 6.4% five years ago. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
The Bottom Line On Ameren's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Ameren is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 92% to shareholders over the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.
Ameren does have some risks, we noticed 3 warning signs (and 1 which is a bit concerning) we think you should know about.
While Ameren 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.
About NYSE:AEE
Ameren
Operates as a public utility holding company in the United States.
Average dividend payer with acceptable track record.
