Did you know there are some financial metrics that can give clues about a potential multi-dredger? In a perfect world, we would like a company to invest more capital in its business and, ideally, also to increase the returns generated with that capital. When you see this, it usually means that it is a company with a great business model and numerous profitable reinvestment opportunities. So in that sense Ampco-Pittsburgh (NYSE: AP) looks quite promising in terms of return on investment development.
What is Return on Capital Employed (ROCE)?
To make it clear whether you are not sure, ROCE is a measure of how much pre-tax income a company earns (in percent) with the capital invested in its business. The formula for this calculation for Ampco-Pittsburgh is:
Return on investment = earnings before interest and taxes (EBIT) ÷ (total assets – current liabilities)
0.018 = $ 6.5 million ÷ ($ 467 million – $ 111 million) (based on the last twelve months through September 2020).
So, Ampco-Pittsburgh has a ROCE of 1.8%. Ultimately, this is a low return and is below the metal and mining industry average of 7.6%.
Check out our latest analysis for Ampco-Pittsburgh
NYSE: AP Return on Capital Employed January 1, 2021
In the graph above, we measured Ampco-Pittsburgh’s previous ROCE against its previous performance, but arguably the future is more important. If you are interested, you can check out the analyst forecasts in our free Report on analyst forecast for the company.
What does the ROCE trend tell us for Ampco-Pittsburgh?
Shareholders will be relieved that Ampco-Pittsburgh has slumped into profitability. The company now makes 1.8% of its capital because it suffered losses five years ago. It is also interesting that the capital employed has remained constant, so that the company does not have to invest additional money to achieve these higher returns. While we’re glad the business is more efficient, keep in mind that there may be a lack of areas in the future to invest internally in for growth. After all, a company can only become a long-term multi-dredger if it continually reinvests in itself with high returns.
The key to take away
As explained above, Ampco-Pittsburgh appears to be becoming more and more competent at generating returns as capital employed has remained unchanged but earnings (before interest and taxes) have increased. Given the stock’s 41% decline over the past five years, this could be a good investment if valuation and other metrics are attractive too. With that in mind, we believe the encouraging trends warrant this stock for further investigation.
One more thing: we have identified ourselves 3 warning signs with Ampco-Pittsburgh (at least 1 that cannot be ignored), and understanding these would certainly be useful.
While Ampco-Pittsburgh may not have the highest returns right now, we’ve compiled a list of companies that currently have a return on equity in excess of 25%. look at that free List here.
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This article from Simply Wall St is of a general nature. It is not a recommendation to buy or sell stocks and does not take into account your goals or your financial situation. We want to provide you with a long-term, focused analysis based on fundamental data. Note that our analysis may not take into account the latest price sensitive company announcements or quality materials. Simply Wall St has no position in the stocks mentioned.
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