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

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at American Electric Power Company (NASDAQ:AEP) and its ROCE trend, we weren't exactly thrilled.

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. 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)

0.05 = US$4.3b ÷ (US$98b - US$11b) (Based on the trailing twelve months to March 2024).

So, American Electric Power Company has an ROCE of 5.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.8%.

View 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're interested, you can view the analysts predictions in our free analyst report for American Electric Power Company .

The Trend Of ROCE

The returns on capital haven't changed much for American Electric Power Company in recent years. Over the past five years, ROCE has remained relatively flat at around 5.0% and the business has deployed 38% more capital into its operations. 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 Bottom Line On American Electric Power Company's ROCE

As we've seen above, American Electric Power Company's returns on capital haven't increased but it is reinvesting in the business. And with the stock having returned a mere 18% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with American Electric Power Company (including 1 which makes us a bit uncomfortable) .

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.