Be Wary Of Atlantica Sustainable Infrastructure (NASDAQ:AY) And Its Returns On Capital

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after glancing at the trends within Atlantica Sustainable Infrastructure (NASDAQ:AY), we weren't too hopeful.

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

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

0.031 = US$251m ÷ (US$8.7b - US$670m) (Based on the trailing twelve months to March 2024).

Thus, Atlantica Sustainable Infrastructure has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 5.5%.

Check out our latest analysis for Atlantica Sustainable Infrastructure

roce

Above you can see how the current ROCE for Atlantica Sustainable Infrastructure compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Atlantica Sustainable Infrastructure for free.

What Does the ROCE Trend For Atlantica Sustainable Infrastructure Tell Us?

We are a bit worried about the trend of returns on capital at Atlantica Sustainable Infrastructure. Unfortunately the returns on capital have diminished from the 4.8% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Atlantica Sustainable Infrastructure becoming one if things continue as they have.

In Conclusion...

In summary, it's unfortunate that Atlantica Sustainable Infrastructure is generating lower returns from the same amount of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 46% 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.

On a final note, we found 3 warning signs for Atlantica Sustainable Infrastructure (1 is a bit unpleasant) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.