Here's What To Make Of Allison Transmission Holdings' (NYSE:ALSN) Decelerating Rates Of Return
If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So while Allison Transmission Holdings (NYSE:ALSN) has a high ROCE right now, lets see what we can decipher from how returns are changing.
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. To calculate this metric for Allison Transmission Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = US$894m ÷ (US$5.0b - US$504m) (Based on the trailing twelve months to September 2023).
Thus, Allison Transmission Holdings has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Machinery industry average of 12%.
View 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is Allison Transmission Holdings' ROCE Trending?
Over the past five years, Allison Transmission Holdings' ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So it may not be a multi-bagger in the making, but given the decent 20% return on capital, it'd be difficult to find fault with the business's current operations.
In Conclusion...
While Allison Transmission Holdings has impressive profitability from its capital, it isn't increasing that amount of capital. And with the stock having returned a mere 27% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
If you want to continue researching Allison Transmission Holdings, you might be interested to know about the 1 warning sign that our analysis has discovered.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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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.
