AES (NYSE:AES) returns hit a wall

If you’re looking for a multi-bagger, there are a few things to watch out for. Among other things, we will want to see two things; first, growth to return to on capital employed (ROCE) and on the other hand, an expansion of the amount 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 investigating AES (NYSE:AES), we don’t think current trends fit the mold of a multi-bagger.

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

Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. The formula for this calculation on AES is:

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

0.084 = $2.4 billion ÷ ($35 billion – $5.8 billion) (Based on the last twelve months to March 2022).

So, AES has a ROCE of 8.4%. On its own, that’s a poor return, but compared to the 3.7% average generated by the renewable energy industry, it’s much better.

See our latest analysis for AES

NYSE:AES Return on Capital Employed May 14, 2022

Above, you can see how AES’s current ROCE compares to its past returns on capital, but you can’t say anything about the past. If you want to see what analysts predict for the future, you should check out our free report for AES.

So what is the ROCE trend for AES?

Things have been fairly stable at AES, with its capital employed and returns on that capital remaining roughly the same over the past five years. It’s not uncommon to see this when looking at a mature, stable company that doesn’t reinvest earnings because it’s probably past that phase of the business cycle. So unless we see a substantial shift at AES in terms of ROCE and additional investment, we wouldn’t be holding our breath that it’s a multi-bagger. This probably explains why AES pays 36% of its income to shareholders in the form of dividends. Since the company does not reinvest in itself, it makes sense to distribute a portion of the profits among the shareholders.

The Key Takeaway

In summary, AES does not accumulate its profits but generates stable returns on the same amount of capital employed. Yet for long-term shareholders, the stock has offered them an incredible 114% return over the past five years, so the market appears to be optimistic about its future. Ultimately, if the underlying trends persist, we won’t be holding our breath that this is a multi-bagger going forward.

If you want to know some of the risks AES faces, we found 3 warning signs (2 are a little nasty!) that you should be aware of before investing here.

If you want to look for strong companies with excellent earnings, check out this free list of companies with strong balance sheets and impressive returns on equity.

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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