Stock Analysis

Investors Shouldn't Overlook Alcoa's (NYSE:AA) Impressive Returns On Capital

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NYSE:AA
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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Alcoa (NYSE:AA) looks great, so lets see what the trend can tell us.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Alcoa is:

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

0.21 = US$2.6b ÷ (US$16b - US$3.5b) (Based on the trailing twelve months to March 2022).

So, Alcoa has an ROCE of 21%. On its own, that's a very good return and it's on par with the returns earned by companies in a similar industry.

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roce
NYSE:AA Return on Capital Employed May 21st 2022

In the above chart we have measured Alcoa's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

Alcoa has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 362% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

The Bottom Line

To bring it all together, Alcoa has done well to increase the returns it's generating from its capital employed. Since the stock has returned a solid 83% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Alcoa (of which 1 is a bit unpleasant!) that you should know about.

Alcoa 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.

What are the risks and opportunities for Alcoa?

Alcoa Corporation, together with its subsidiaries, produces and sells bauxite, alumina, and aluminum products in the United States, Spain, Australia, Iceland, Norway, Brazil, Canada, and internationally.

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Rewards

  • Trading at 51.4% below our estimate of its fair value

  • Earnings are forecast to grow 73.83% per year

Risks

No risks detected for AA from our risks checks.

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