Allison Transmission Holdings (NYSE:ALSN) Is Looking To Continue Growing Its Returns On Capital
If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Allison Transmission Holdings (NYSE:ALSN) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What is it?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Allison Transmission Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = US$700m ÷ (US$4.5b - US$489m) (Based on the trailing twelve months to March 2022).
So, Allison Transmission Holdings has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 9.3% it's much better.
See our latest analysis for Allison Transmission Holdings
Above you can see how the current ROCE for Allison Transmission Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Allison Transmission Holdings here for free.
So How Is Allison Transmission Holdings' ROCE Trending?
Allison Transmission Holdings is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 34% over the last five years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
In Conclusion...
To bring it all together, Allison Transmission Holdings has done well to increase the returns it's generating from its capital employed. Since the stock has only returned 13% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
One final note, you should learn about the 2 warning signs we've spotted with Allison Transmission Holdings (including 1 which can't be ignored) .
While Allison Transmission Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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