Shareholders Are Optimistic That Allison Transmission Holdings (NYSE:ALSN) Will Multiply In Value

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Ergo, when we looked at the ROCE trends at Allison Transmission Holdings (NYSE:ALSN), we liked what we saw.

What Is 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 Allison Transmission Holdings:

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

0.21 = US$1.0b ÷ (US$5.4b - US$563m) (Based on the trailing twelve months to September 2024).

Therefore, Allison Transmission Holdings has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Machinery industry average of 12%.

Check out our latest analysis for Allison Transmission Holdings

In the above chart we have measured Allison Transmission Holdings' 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 Allison Transmission Holdings for free.

The Trend Of ROCE

Allison Transmission Holdings deserves to be commended in regards to it's returns. The company has consistently earned 21% for the last five years, and the capital employed within the business has risen 20% in that time. Now considering ROCE is an attractive 21%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. You'll see this when looking at well operated businesses or favorable business models.

In Conclusion...

Allison Transmission Holdings has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. And long term investors would be thrilled with the 146% return they've received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

Allison Transmission Holdings does have some risks though, and we've spotted 2 warning signs for Allison Transmission Holdings that you might be interested in.

Allison Transmission Holdings is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.