Ampco-Pittsburgh (NYSE:AP) Is Looking To Continue Growing Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So on that note, Ampco-Pittsburgh (NYSE:AP) looks quite promising in regards to its trends of return on capital.

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. Analysts use this formula to calculate it for Ampco-Pittsburgh:

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

0.0033 = US$1.2m ÷ (US$502m - US$129m) (Based on the trailing twelve months to June 2022).

So, Ampco-Pittsburgh has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 21%.

View our latest analysis for Ampco-Pittsburgh

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Ampco-Pittsburgh has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Ampco-Pittsburgh's ROCE Trend?

Shareholders will be relieved that Ampco-Pittsburgh has broken into profitability. The company now earns 0.3% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

The Bottom Line

As discussed above, Ampco-Pittsburgh appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Although the company may be facing some issues elsewhere since the stock has plunged 79% in the last five years. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

Like most companies, Ampco-Pittsburgh does come with some risks, and we've found 1 warning sign that you should be aware of.

While Ampco-Pittsburgh 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.