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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at AGL Energy (ASX:AGL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on AGL Energy is:

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

0.12 = AU$1.3b ÷ (AU$15b - AU$4.1b) (Based on the trailing twelve months to December 2024).

Thus, AGL Energy has an ROCE of 12%.  In absolute terms, that's a satisfactory return, but compared to the Integrated Utilities industry average of 5.3% it's much better.

Check out our latest analysis for AGL Energy ASX:AGL Return on Capital Employed March 7th 2025

Above you can see how the current ROCE for AGL Energy 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 AGL Energy  for free.

What Can We Tell From AGL Energy's ROCE Trend?

Over the past five years, AGL Energy's ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect AGL Energy to be a multi-bagger going forward. With fewer investment opportunities, it makes sense that AGL Energy has been paying out a decent 54% of its earnings to shareholders. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.

Our Take On AGL Energy's ROCE

We can conclude that in regards to AGL Energy's returns on capital employed and the trends, there isn't much change to report on. Since the stock has declined 23% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Story Continues

One more thing, we've spotted  4 warning signs  facing AGL Energy that you might find interesting.

For those who like to invest in solid companies, check out this freelist 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.

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