Returns On Capital At American Electric Power Company (NASDAQ:AEP) Have Hit The Brakes

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Although, when we looked at American Electric Power Company (NASDAQ:AEP), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for American Electric Power Company, this is the formula:

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

0.047 = US$4.2b ÷ (US$100b - US$10b) (Based on the trailing twelve months to June 2024).

Therefore, American Electric Power Company has an ROCE of 4.7%. Even though it's in line with the industry average of 4.7%, it's still a low return by itself.

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, you can check out the forecasts from the analysts covering American Electric Power Company for free.

How Are Returns Trending?

There are better returns on capital out there than what we're seeing at American Electric Power Company. The company has employed 39% more capital in the last five years, and the returns on that capital have remained stable at 4.7%. 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.

Our Take On American Electric Power Company's ROCE

In conclusion, American Electric Power Company has been investing more capital into the business, but returns on that capital haven't increased. And with the stock having returned a mere 30% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

One final note, you should learn about the 3 warning signs we've spotted with American Electric Power Company (including 1 which shouldn't be ignored) .

While American Electric Power Company may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.