Returns On Capital At American Electric Power Company (NASDAQ:AEP) Have Stalled

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Having said that, from a first glance at American Electric Power Company (NASDAQ:AEP) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

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 American Electric Power Company is:

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

0.047 = US$3.9b ÷ (US$95b - US$11b) (Based on the trailing twelve months to September 2023).

So, American Electric Power Company has an ROCE of 4.7%. On its own, that's a low figure but it's around the 4.4% average generated by the Electric Utilities industry.

See our latest analysis for American Electric Power Company

Above you can see how the current ROCE for American Electric Power Company compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering American Electric Power Company here for free.

What Can We Tell From American Electric Power Company's ROCE Trend?

The returns on capital haven't changed much for American Electric Power Company in recent years. The company has consistently earned 4.7% for the last five years, and the capital employed within the business has risen 42% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Key Takeaway

Long story short, while American Electric Power Company has been reinvesting its capital, the returns that it's generating haven't increased. Unsurprisingly, the stock has only gained 20% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you want to know some of the risks facing American Electric Power Company we've found 3 warning signs (1 is potentially serious!) that you should be aware of before investing here.

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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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.