If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. However, after investigating Atmos Energy (NYSE:ATO), we don't think it's current trends fit the mold of a multi-bagger.
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. To calculate this metric for Atmos Energy, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.051 = US$1.2b ÷ (US$24b - US$1.2b) (Based on the trailing twelve months to December 2023).
Thus, Atmos Energy has an ROCE of 5.1%. In absolute terms, that's a low return but it's around the Gas Utilities industry average of 6.2%.
See our latest analysis for Atmos Energy
Above you can see how the current ROCE for Atmos Energy 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 analyst report for Atmos Energy .
So How Is Atmos Energy's ROCE Trending?
The trend of ROCE doesn't look fantastic because it's fallen from 6.4% five years ago, while the business's capital employed increased by 102%. Usually this isn't ideal, but given Atmos Energy conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Atmos Energy probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.
The Bottom Line
We're a bit apprehensive about Atmos Energy because despite more capital being deployed in the business, returns on that capital and sales have both fallen. In spite of that, the stock has delivered a 30% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.
On a final note, we've found 2 warning signs for Atmos Energy that we think you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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:ATO
Atmos Energy
Engages in the regulated natural gas distribution, and pipeline and storage businesses in the United States.
Solid track record average dividend payer.
