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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Ampco-Pittsburgh (NYSE:AP) and its trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Ampco-Pittsburgh is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.025 = US$11m ÷ (US$566m - US$117m) (Based on the trailing twelve months to December 2023).
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 9.4%.
See our latest analysis for Ampco-Pittsburgh
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Ampco-Pittsburgh's past further, check out this free graph covering Ampco-Pittsburgh's past earnings, revenue and cash flow.
The Trend Of ROCE
We're delighted to see that Ampco-Pittsburgh is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 2.5%, which is always encouraging. While returns have increased, the amount of capital employed by Ampco-Pittsburgh has remained flat over the period. 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. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.
What We Can Learn From Ampco-Pittsburgh's ROCE
To bring it all together, Ampco-Pittsburgh has done well to increase the returns it's generating from its capital employed. Given the stock has declined 33% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.