The Return Trends At Ampco-Pittsburgh (NYSE:AP) Look Promising

By
Simply Wall St
Published
August 12, 2021
NYSE:AP
Source: Shutterstock

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Ampco-Pittsburgh (NYSE:AP) and its trend of ROCE, we really liked what we saw.

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. To calculate this metric for Ampco-Pittsburgh, this is the formula:

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

0.0094 = US$3.3m ÷ (US$469m - US$117m) (Based on the trailing twelve months to June 2021).

Therefore, Ampco-Pittsburgh has an ROCE of 0.9%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 12%.

See our latest analysis for Ampco-Pittsburgh

roce
NYSE:AP Return on Capital Employed August 13th 2021

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ampco-Pittsburgh's ROCE against it's prior returns. If you're interested in investigating Ampco-Pittsburgh's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

Like most people, we're pleased that Ampco-Pittsburgh is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 0.9% which is no doubt a relief for some early shareholders. In regards to capital employed, Ampco-Pittsburgh is using 29% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

The Key Takeaway

In the end, Ampco-Pittsburgh has proven it's capital allocation skills are good with those higher returns from less amount of capital. Astute investors may have an opportunity here because the stock has declined 59% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing to note, we've identified 3 warning signs with Ampco-Pittsburgh and understanding them should be part of your investment process.

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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