Yahoo Finance American Electric Power Company (NASDAQ:AEP) Hasn't Managed To Accelerate Its Returns
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. In light of that, when we looked at American Electric Power Company (NASDAQ:AEP) and its ROCE trend, we weren't exactly thrilled.
Understanding 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. Analysts use this formula to calculate it for American Electric Power Company:
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).
So, 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.
View 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.
What The Trend Of ROCE Can Tell Us
In terms of American Electric Power Company's historical ROCE trend, it doesn't exactly demand attention. 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.
The Bottom Line On American Electric Power Company's ROCE
As we've seen above, American Electric Power Company's returns on capital haven't increased but it is reinvesting in the business. And investors may be recognizing these trends since the stock has only returned a total of 30% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
If you'd like to know more about American Electric Power Company, we've spotted 3 warning signs, and 1 of them is significant.
While American Electric Power Company isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
