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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Ampco-Pittsburgh (NYSE:AP) so let's look a bit deeper.
Return On Capital Employed (ROCE): What Is It?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Ampco-Pittsburgh:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.025 = US$11m ÷ (US$561m - US$125m) (Based on the trailing twelve months to June 2024).
Therefore, Ampco-Pittsburgh has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 9.6%.
See our latest analysis for Ampco-Pittsburgh
Historical performance is a great place to start when researching a stock so above you can see the gauge for Ampco-Pittsburgh's ROCE against it's prior returns. If you'd like to look at how Ampco-Pittsburgh has performed in the past in other metrics, you can view this free graph of Ampco-Pittsburgh's past earnings, revenue and cash flow.
The Trend Of ROCE
Ampco-Pittsburgh has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 2.5% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
In Conclusion...
To bring it all together, Ampco-Pittsburgh has done well to increase the returns it's generating from its capital employed. And since the stock has fallen 48% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.