Yahoo Finance Here's What's Concerning About American Electric Power Company's (NASDAQ:AEP) Returns On Capital
If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating American Electric Power Company (NASDAQ:AEP), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What is it?
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$3.5b ÷ (US$88b - US$12b) (Based on the trailing twelve months to December 2021).
Thus, 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.
See our latest analysis for American Electric Power Company
Above you can see how the current ROCE for American Electric Power Company 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 American Electric Power Company.
So How Is American Electric Power Company's ROCE Trending?
When we looked at the ROCE trend at American Electric Power Company, we didn't gain much confidence. Around five years ago the returns on capital were 6.4%, but since then they've fallen to 4.7%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
In Conclusion...
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for American Electric Power Company. And the stock has followed suit returning a meaningful 71% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.
American Electric Power Company does have some risks, we noticed 3 warning signs (and 1 which can't be ignored) we think you should know about.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.
