If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. In light of that, when we looked at Atmos Energy (NYSE:ATO) and its ROCE trend, we weren't exactly thrilled.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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).
Therefore, 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 5.9%.
In the above chart we have measured Atmos Energy's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Atmos Energy .
So How Is Atmos Energy's ROCE Trending?
Unfortunately, the trend isn't great with ROCE falling from 6.4% five years ago, while capital employed has grown 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.
In Conclusion...
From the above analysis, we find it rather worrisome that returns on capital and sales for Atmos Energy have fallen, meanwhile the business is employing more capital than it was five years ago. Despite the concerning underlying trends, the stock has actually gained 32% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.
If you want to continue researching Atmos Energy, you might be interested to know about the 2 warning signs that our analysis has discovered.
While Atmos Energy may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.