Ameren (NYSE:AEE) may have issues allocating capital

If we want to find a potential multi-bagger, there are often underlying trends that can provide clues. Ideally, a business will show two trends; first growth to return to on capital employed (ROCE) and on the other hand, growth quantity capital employed. Simply put, these types of businesses are slot machines, meaning they continually reinvest their profits at ever-higher rates of return. However, after briefly looking at the numbers, we don’t think American (NYSE: AEE) has the makings of a multi-bagger in the future, but let’s see why it may be.

Return on capital employed (ROCE): what is it?

For those who don’t know what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital used in its business. To calculate this metric for Ameren, here is the formula:

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

0.046 = $1.5 billion ÷ ($35 billion – $2.4 billion) (Based on the last twelve months to September 2021).

So, Ameren posted a ROCE of 4.6%. Even though it’s in line with the industry average of 4.6%, it’s still a poor performer on its own.

See our latest analysis for Ameren

NYSE: AEE Return on Capital Employed February 14, 2022

In the chart above, we measured Ameren’s past ROCE against its past performance, but the future is arguably more important. If you want, you can check out analyst forecasts covering Ameren here for free.

So, what is Ameren’s ROCE trend?

In terms of Ameren’s historic ROCE moves, the trend isn’t fantastic. Over the past five years, capital returns have declined to 4.6% from 6.3% five years ago. Meanwhile, the company is using more capital, but that hasn’t changed much in terms of sales over the past 12 months, so that could reflect longer-term investments. It’s worth keeping an eye on the company’s earnings going forward to see if those investments end up contributing to the bottom line.

Our take on Ameren’s ROCE

In summary, while we are somewhat encouraged by Ameren’s reinvestment in its own business, we are aware that returns are diminishing. Considering the stock has gained an impressive 84% over the past five years, investors must be thinking there are better things to come. However, unless these underlying trends turn more positive, we wouldn’t be too hopeful.

Ameren does come with some risks though, we have found 3 warning signs in our investment analysis, and 1 of them makes us a little uncomfortable…

Although Ameren isn’t currently making the highest returns, we’ve compiled a list of companies that are currently generating more than 25% return on equity. look at this free list here.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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