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There are a few key trends to look for if we want to identify the next 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at American Electric Power Company (NASDAQ:AEP) and its ROCE trend, we weren't exactly thrilled.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on American Electric Power Company is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.046 = US$4.1b ÷ (US$100b - US$11b) (Based on the trailing twelve months to September 2024).
Therefore, American Electric Power Company has an ROCE of 4.6%. Even though it's in line with the industry average of 4.8%, it's still a low return by itself.
View our latest analysis for American Electric Power Company
Above you can see how the current ROCE for American Electric Power Company compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for American Electric Power Company .
How Are Returns Trending?
In terms of American Electric Power Company's historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 4.6% and the business has deployed 37% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
In Conclusion...
Long story short, while American Electric Power Company has been reinvesting its capital, the returns that it's generating haven't increased. And investors may be recognizing these trends since the stock has only returned a total of 15% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
American Electric Power Company does have some risks, we noticed 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.