What trends should we look for in a company to find a multi-bagger stock? First of all, we would like to determine a growing return on capital employed (ROCE) and, at the same time, a constantly growing base of the capital employed. Simply put, these types of companies are compounding machines, which means that they are continually reinvesting their profits with ever higher returns. So in this sense, Ampco-Pittsburgh (NYSE: AP) looks quite promising in terms of return on investment development.
What is return on investment (ROCE)?
To make it clear whether you are not sure, ROCE is a measure of how much pre-tax income a company earns (as a percentage) with the capital invested in its business. To calculate this metric for Ampco-Pittsburgh, the formula is:
Return on investment = earnings before interest and taxes (EBIT) ÷ (total assets – current liabilities)
0.015 = $ 5.5 million ÷ ($ 463 million – $ 105 million) (based on the last twelve months through December 2020).
So, Ampco-Pittsburgh has a ROCE of 1.5%. Ultimately, this is a low return and is below the metal and mining industry average of 9.5%.
Check out our latest analysis for Ampco-Pittsburgh
NYSE: AP Return on Capital Employed April 12, 2021
Although the past is not representative of the future, it can be helpful to know how a company has done in the past. That’s why we have this table above. If you want to see how Ampco-Pittsburgh has done in the past on other metrics, you can view this free Graph of past profits, sales and cash flow.
What does the ROCE trend tell us for Ampco-Pittsburgh?
Shareholders will be relieved that Ampco-Pittsburgh has slumped into profitability. The company made losses five years ago but managed to turn it around and as we’ve already seen it is now earning 1.5%, which is always encouraging. Interestingly, the company’s capital has stayed relatively flat, so those higher returns either come from previous investments that paid off or from efficiency gains. 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. So if you are aiming for high growth, you want a company’s capital employed to increase too.
Conclusion on the ROCE of Ampco-Pittsburgh
As explained above, Ampco-Pittsburgh seems to be becoming more and more competent at generating returns as capital employed has remained unchanged but earnings (before interest and taxes) have increased. And since the stock has fallen 60% in the past five years, there may be an opportunity here. It therefore seems warranted to investigate this company further and determine whether or not these trends will continue.
If you’re interested in learning more about the risks of Ampco-Pittsburgh, we’ve discovered this 1 warning sign you should be aware of that.
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 greater than 25%. look at that free List here.
To trade Ampco-Pittsburgh, open an account with the lowest cost * platform trusted by the professionals, Interactive Brokers. Your clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account.
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.
* Interactive brokers have been rated as Lowest Cost Brokers by StockBrokers.com. Annual online review 2020
Do you have any feedback on this article? Concerned about the content? Get in touch directly with us. Alternatively, you can also send an email to the editorial team (at) simplywallst.com.