Returns On Capital At ALLETE (NYSE:ALE) Paint A Concerning Picture
If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Having said that, from a first glance at ALLETE (NYSE:ALE) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What Is Return On Capital Employed (ROCE)?
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 ALLETE is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.023 = US$144m ÷ (US$6.8b - US$716m) (Based on the trailing twelve months to December 2022).
Therefore, ALLETE has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Electric Utilities industry average of 4.7%.
Check out our latest analysis for ALLETE
Above you can see how the current ROCE for ALLETE 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.
How Are Returns Trending?
We weren't thrilled with the trend because ALLETE's ROCE has reduced by 52% over the last five years, while the business employed 30% more capital. That being said, ALLETE raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence ALLETE might not have received a full period of earnings contribution from it. Additionally, we found that ALLETE's most recent EBIT figure is around the same as the prior year, so we'd attribute the drop in ROCE mostly to the capital raise.
What We Can Learn From ALLETE's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that ALLETE is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 5.6% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.
If you'd like to know more about ALLETE, we've spotted 2 warning signs, and 1 of them is potentially serious.
While ALLETE 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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