American Electric Power Company's (NASDAQ:AEP) Returns On Capital Not Reflecting Well On The Business

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Although, when we looked at American Electric Power Company (NASDAQ:AEP), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for American Electric Power Company:

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

0.045 = US$3.7b ÷ (US$96b - US$13b) (Based on the trailing twelve months to June 2023).

Thus, American Electric Power Company has an ROCE of 4.5%. On its own, that's a low figure but it's around the 4.5% average generated by the Electric Utilities industry.

Check out our latest analysis for American Electric Power Company

In the above chart we have measured American Electric Power Company's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for American Electric Power Company.

The Trend Of ROCE

In terms of American Electric Power Company's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 5.8%, but since then they've fallen to 4.5%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On American Electric Power Company's ROCE

To conclude, we've found that American Electric Power Company is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 34% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

On a final note, we found 2 warning signs for American Electric Power Company (1 doesn't sit too well with us) you should be aware of.

While American Electric Power Company 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.