If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. 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)
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. Analysts use this formula to calculate it for Ampco-Pittsburgh:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.019 = US$8.0m ÷ (US$547m - US$120m) (Based on the trailing twelve months to December 2024).
Thus, Ampco-Pittsburgh has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 10%.
View 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 , check out these free graphs detailing revenue and cash flow performance of Ampco-Pittsburgh.
The Trend Of ROCE
While there are companies with higher returns on capital out there, we still find the trend at Ampco-Pittsburgh promising. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 76% in that same time. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
What We Can Learn From Ampco-Pittsburgh's ROCE
As discussed above, Ampco-Pittsburgh appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up.
One more thing: We've identified 4 warning signs with Ampco-Pittsburgh (at least 1 which is significant) , and understanding them would certainly be useful.
While Ampco-Pittsburgh 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.