ALLETE's (NYSE:ALE) Returns On Capital Not Reflecting Well On The Business

By
Simply Wall St
Published
September 07, 2021
NYSE:ALE
Source: Shutterstock

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think ALLETE (NYSE:ALE) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for ALLETE:

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

0.027 = US$155m ÷ (US$6.3b - US$596m) (Based on the trailing twelve months to June 2021).

So, ALLETE has an ROCE of 2.7%. In absolute terms, that's a low return and it also under-performs the Electric Utilities industry average of 4.6%.

View our latest analysis for ALLETE

roce
NYSE:ALE Return on Capital Employed September 8th 2021

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, you can check out the forecasts from the analysts covering ALLETE here for free.

What The Trend Of ROCE Can Tell Us

In terms of ALLETE's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 2.7% from 5.7% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From ALLETE's ROCE

While returns have fallen for ALLETE in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 32% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

ALLETE does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

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.

If you decide to trade ALLETE, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted


Discounted cash flow calculation for every stock

Simply Wall St does a detailed discounted cash flow calculation every 6 hours for every stock on the market, so if you want to find the intrinsic value of any company just search here. It’s FREE.

Make Confident Investment Decisions

Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.