Returns Are Gaining Momentum At Ampco-Pittsburgh (NYSE:AP)
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Ampco-Pittsburgh's (NYSE:AP) returns on capital, so let's have a look.
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. The formula for this calculation on Ampco-Pittsburgh is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.007 = US$2.4m ÷ (US$464m - US$120m) (Based on the trailing twelve months to September 2021).
So, Ampco-Pittsburgh has an ROCE of 0.7%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 17%.
Check out our latest analysis for Ampco-Pittsburgh
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Ampco-Pittsburgh, check out these free graphs here.
The Trend Of ROCE
It's great to see that Ampco-Pittsburgh has started to generate some pre-tax earnings from prior investments. While the business is profitable now, it used to be incurring losses on invested capital five years ago. In regards to capital employed, Ampco-Pittsburgh is using 24% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. This could potentially mean that the company is selling some of its assets.
Our Take On Ampco-Pittsburgh's ROCE
In the end, Ampco-Pittsburgh has proven it's capital allocation skills are good with those higher returns from less amount of capital. And since the stock has fallen 64% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.
One more thing: We've identified 3 warning signs with Ampco-Pittsburgh (at least 1 which shouldn't be ignored) , and understanding these would certainly be useful.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
