If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Avista (NYSE:AVA), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Avista:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.03 = US$206m ÷ (US$7.4b - US$541m) (Based on the trailing twelve months to June 2023).
Therefore, Avista has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Integrated Utilities industry average of 5.0%.
View our latest analysis for Avista
In the above chart we have measured Avista'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 Avista here for free.
So How Is Avista's ROCE Trending?
In terms of Avista's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 3.0% from 5.3% five years ago. However it looks like Avista might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
Our Take On Avista's ROCE
Bringing it all together, while we're somewhat encouraged by Avista's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 20% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
One final note, you should learn about the 5 warning signs we've spotted with Avista (including 2 which are a bit unpleasant) .
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:AVA
Solid track record established dividend payer.
