Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. 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.
What Is Return On Capital Employed (ROCE)?
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)
0.022 = US$138m ÷ (US$6.7b - US$464m) (Based on the trailing twelve months to March 2023).
So, ALLETE has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Electric Utilities industry average of 4.6%.
Check out our latest analysis for ALLETE
In the above chart we have measured ALLETE'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 ALLETE here for free.
SWOT Analysis for ALLETE
- No major strengths identified for ALE.
- Earnings declined over the past year.
- Interest payments on debt are not well covered.
- Dividend is low compared to the top 25% of dividend payers in the Electric Utilities market.
- Annual earnings are forecast to grow for the next 3 years.
- Good value based on P/E ratio compared to estimated Fair P/E ratio.
- Debt is not well covered by operating cash flow.
- Dividends are not covered by cash flow.
- Annual earnings are forecast to grow slower than the American market.
The Trend Of ROCE
We weren't thrilled with the trend because ALLETE's ROCE has reduced by 52% over the last five years, while the business employed 34% 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
In summary, despite lower returns in the short term, we're encouraged to see that ALLETE is reinvesting for growth and has higher sales as a result. However, total returns to shareholders over the last five years have been flat, which could indicate these growth trends potentially aren't accounted for yet by investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
If you want to know some of the risks facing ALLETE we've found 2 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.
While ALLETE 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.
About NYSE:ALE
Established dividend payer with mediocre balance sheet.
