Yahoo Finance Investors Met With Slowing Returns on Capital At Ameren (NYSE:AEE)
If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. 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.
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 Ameren is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.049 = US$1.9b ÷ (US$41b - US$3.3b) (Based on the trailing twelve months to December 2023).
So, Ameren has an ROCE of 4.9%. Even though it's in line with the industry average of 4.9%, it's still a low return by itself.
View 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 for free.
What The Trend Of ROCE Can Tell Us
There are better returns on capital out there than what we're seeing at Ameren. The company has employed 53% more capital in the last five years, and the returns on that capital have remained stable at 4.9%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
Our Take On Ameren's ROCE
In summary, Ameren has simply been reinvesting capital and generating the same low rate of return as before. And with the stock having returned a mere 17% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
On a final note, we found 2 warning signs for Ameren (1 is potentially serious) 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.
