If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. With that in mind, we've noticed some promising trends at Alamo Group (NYSE:ALG) so let's look a bit deeper.
Return On Capital Employed (ROCE): What Is It?
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 Alamo Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = US$166m ÷ (US$1.6b - US$207m) (Based on the trailing twelve months to June 2025).
Thus, Alamo Group has an ROCE of 12%. That's a pretty standard return and it's in line with the industry average of 12%.
See our latest analysis for Alamo Group
Above you can see how the current ROCE for Alamo Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Alamo Group .
What The Trend Of ROCE Can Tell Us
Alamo Group is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 12%. The amount of capital employed has increased too, by 28%. So we're very much inspired by what we're seeing at Alamo Group thanks to its ability to profitably reinvest capital.
What We Can Learn From Alamo Group's ROCE
To sum it up, Alamo Group has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 80% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
On a separate note, we've found 1 warning sign for Alamo Group you'll probably want to know about.
While Alamo Group 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. 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.