Returns On Capital Are Showing Encouraging Signs At Ampco-Pittsburgh (NYSE:AP)
What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. With that in mind, we've noticed some promising trends at Ampco-Pittsburgh (NYSE:AP) so let's look a bit deeper.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its 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)
0.027 = US$11m ÷ (US$515m - US$125m) (Based on the trailing twelve months to June 2023).
So, Ampco-Pittsburgh has an ROCE of 2.7%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 9.9%.
View our latest analysis for Ampco-Pittsburgh
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'd like to look at how Ampco-Pittsburgh has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From Ampco-Pittsburgh's ROCE Trend?
Shareholders will be relieved that Ampco-Pittsburgh has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 2.7% on its capital. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.
Our Take On Ampco-Pittsburgh's ROCE
To bring it all together, Ampco-Pittsburgh has done well to increase the returns it's generating from its capital employed. And since the stock has fallen 39% 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.
Ampco-Pittsburgh does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those shouldn't be ignored...
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.
