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What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Ampco-Pittsburgh (NYSE:AP) looks quite promising in regards to its trends of return on capital.
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 Ampco-Pittsburgh is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.018 = US$6.5m ÷ (US$467m - US$111m) (Based on the trailing twelve months to September 2020).
Therefore, Ampco-Pittsburgh has an ROCE of 1.8%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 7.6%.
View our latest analysis for Ampco-Pittsburgh
Above you can see how the current ROCE for Ampco-Pittsburgh 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 report for Ampco-Pittsburgh.
What Does the ROCE Trend For Ampco-Pittsburgh Tell Us?
Ampco-Pittsburgh has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 1.8% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Ampco-Pittsburgh has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
Our Take On Ampco-Pittsburgh's ROCE
To sum it up, Ampco-Pittsburgh is collecting higher returns from the same amount of capital, and that's impressive. And since the stock has fallen 41% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.
If you want to know some of the risks facing Ampco-Pittsburgh we've found 3 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.