What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at American Public Education (NASDAQ:APEI) and its ROCE trend, we weren't exactly thrilled.
What is 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 American Public Education:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.068 = US$21m ÷ (US$362m - US$54m) (Based on the trailing twelve months to June 2020).
So, American Public Education has an ROCE of 6.8%. Ultimately, that's a low return and it under-performs the Consumer Services industry average of 8.7%.
Above you can see how the current ROCE for American Public Education compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
How Are Returns Trending?
In terms of American Public Education's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 24%, but since then they've fallen to 6.8%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line
To conclude, we've found that American Public Education is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 34% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
On a final note, we've found 2 warning signs for American Public Education that we think 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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