Slowing Rates Of Return At Aperam (AMS:APAM) Leave Little Room For Excitement

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Aperam (AMS:APAM) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Aperam, this is the formula:

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

0.10 = €306m ÷ (€3.3b - €378m) (Based on the trailing twelve months to March 2021).

Thus, Aperam has an ROCE of 10%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Metals and Mining industry average of 8.8%.

Check out our latest analysis for Aperam

In the above chart we have measured Aperam'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 Aperam here for free.

So How Is Aperam's ROCE Trending?

Things have been pretty stable at Aperam, with its capital employed and returns on that capital staying somewhat the same for the last five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Aperam doesn't end up being a multi-bagger in a few years time. With fewer investment opportunities, it makes sense that Aperam has been paying out a decent 50% of its earnings to shareholders. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.

The Bottom Line On Aperam's ROCE

In summary, Aperam isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has gained an impressive 68% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a final note, we found 3 warning signs for Aperam (1 is potentially serious) you should be aware of.

While Aperam 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. 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.
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