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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Ampco-Pittsburgh (NYSE:AP) and its trend of ROCE, we really liked what we saw.
What is Return On Capital Employed (ROCE)?
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. To calculate this metric for Ampco-Pittsburgh, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.008 = US$2.8m ÷ (US$471m - US$119m) (Based on the trailing twelve months to March 2021).
So, Ampco-Pittsburgh has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 12%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Ampco-Pittsburgh's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Ampco-Pittsburgh, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
We're delighted to see that Ampco-Pittsburgh is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but now it's turned around, earning 0.8% which is no doubt a relief for some early shareholders. Additionally, the business is utilizing 32% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.
The Key Takeaway
In summary, it's great to see that Ampco-Pittsburgh has been able to turn things around and earn higher returns on lower amounts of capital. And since the stock has fallen 45% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
On a final note, we've found 2 warning signs for Ampco-Pittsburgh that we think you should be aware of.
While Ampco-Pittsburgh isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
This article by Simply Wall St is general in nature. 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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