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How Well Is ALLETE (NYSE:ALE) Allocating Its Capital?

Simply Wall St
·3 min read

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after glancing at the trends within ALLETE (NYSE:ALE), we weren't too hopeful.

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. The formula for this calculation on ALLETE is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.033 = US$173m ÷ (US$5.9b - US$630m) (Based on the trailing twelve months to September 2020).

Therefore, ALLETE has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Electric Utilities industry average of 4.6%.

Check out our latest analysis for ALLETE

roce
roce

In the above chart we have measured ALLETE's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for ALLETE.

So How Is ALLETE's ROCE Trending?

In terms of ALLETE's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 5.1%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on ALLETE becoming one if things continue as they have.

Our Take On ALLETE's ROCE

In summary, it's unfortunate that ALLETE is generating lower returns from the same amount of capital. However the stock has delivered a 54% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you want to continue researching ALLETE, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.

This article by Simply Wall St is general in nature. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.