Returns On Capital At Ampol (ASX:ALD) Paint A Concerning Picture
Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. In light of that, when we looked at Ampol (ASX:ALD) and its ROCE trend, we weren't exactly thrilled.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Ampol:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.028 = AU$216m ÷ (AU$13b - AU$5.0b) (Based on the trailing twelve months to June 2023).
Therefore, Ampol has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 16%.
Check out our latest analysis for Ampol
In the above chart we have measured Ampol's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Ampol here for free.
What Can We Tell From Ampol's ROCE Trend?
The trend of ROCE doesn't look fantastic because it's fallen from 24% five years ago, while the business's capital employed increased by 66%. That being said, Ampol raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Ampol probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.
The Bottom Line On Ampol's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Ampol. Furthermore the stock has climbed 61% over the last five years, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.
One final note, you should learn about the 3 warning signs we've spotted with Ampol (including 1 which is potentially serious) .
While Ampol may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.
