Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Having said that, from a first glance at ALLETE (NYSE:ALE) 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?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for ALLETE, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.029 = US$177m ÷ (US$6.6b - US$380m) (Based on the trailing twelve months to June 2023).
Therefore, ALLETE has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Electric Utilities industry average of 4.5%.
View our latest analysis for ALLETE
Above you can see how the current ROCE for ALLETE compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for ALLETE.
So How Is ALLETE's ROCE Trending?
We weren't thrilled with the trend because ALLETE's ROCE has reduced by 32% over the last five years, while the business employed 30% more capital. Usually this isn't ideal, but given ALLETE conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence ALLETE might not have received a full period of earnings contribution from it.
The Bottom Line
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for ALLETE. These growth trends haven't led to growth returns though, since the stock has fallen 14% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
If you want to continue researching ALLETE, you might be interested to know about the 1 warning sign that our analysis has discovered.
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.
About NYSE:ALE
Average dividend payer with mediocre balance sheet.
