American Axle & Manufacturing Holdings (NYSE:AXL) Has More To Do To Multiply In Value Going Forward

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at American Axle & Manufacturing Holdings (NYSE:AXL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper 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. Analysts use this formula to calculate it for American Axle & Manufacturing Holdings:

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

0.066 = US$265m ÷ (US$5.3b - US$1.3b) (Based on the trailing twelve months to September 2024).

Thus, American Axle & Manufacturing Holdings has an ROCE of 6.6%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 11%.

Check out our latest analysis for American Axle & Manufacturing Holdings

Above you can see how the current ROCE for American Axle & Manufacturing Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering American Axle & Manufacturing Holdings for free.

So How Is American Axle & Manufacturing Holdings' ROCE Trending?

Over the past five years, American Axle & Manufacturing Holdings' ROCE has remained relatively flat while the business is using 34% less capital than before. This indicates to us that assets are being sold and thus the business is likely shrinking, which you'll remember isn't the typical ingredients for an up-and-coming multi-bagger. Not only that, but the low returns on this capital mentioned earlier would leave most investors unimpressed.

In Conclusion...

Overall, we're not ecstatic to see American Axle & Manufacturing Holdings reducing the amount of capital it employs in the business. And in the last five years, the stock has given away 40% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a final note, we found 2 warning signs for American Axle & Manufacturing Holdings (1 doesn't sit too well with us) you should be aware of.

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.