Allegheny Technologies (NYSE:ATI) Shareholders Will Want The ROCE Trajectory To Continue

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Allegheny Technologies' (NYSE:ATI) returns on capital, so let's have a look.

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. To calculate this metric for Allegheny Technologies, this is the formula:

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

0.062 = US$208m ÷ (US$4.2b - US$877m) (Based on the trailing twelve months to March 2022).

Therefore, Allegheny Technologies has an ROCE of 6.2%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 20%.

View our latest analysis for Allegheny Technologies

Above you can see how the current ROCE for Allegheny Technologies 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?

We're pretty happy with how the ROCE has been trending at Allegheny Technologies. We found that the returns on capital employed over the last five years have risen by 256%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Allegheny Technologies appears to been achieving more with less, since the business is using 23% less capital to run its operation. Allegheny Technologies may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

Our Take On Allegheny Technologies' ROCE

In summary, it's great to see that Allegheny Technologies has been able to turn things around and earn higher returns on lower amounts of capital. Since the stock has only returned 32% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Allegheny Technologies (of which 1 is a bit unpleasant!) that you should know about.

While Allegheny Technologies isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.