Some Investors May Be Worried About American Electric Power Company's (NASDAQ:AEP) Returns On Capital

Simply Wall St
·3 min read

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. Although, when we looked at American Electric Power Company (NASDAQ:AEP), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.043 = US$3.2b ÷ (US$83b - US$10b) (Based on the trailing twelve months to March 2021).

So, American Electric Power Company has an ROCE of 4.4%. Even though it's in line with the industry average of 4.5%, it's still a low return by itself.

See our latest analysis for American Electric Power Company

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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 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?

In terms of American Electric Power Company's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 5.7% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

To conclude, we've found that American Electric Power Company is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 57% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

American Electric Power Company does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit concerning...

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.

This article by Simply Wall St is general in nature. 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.

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