If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. However, after briefly looking over the numbers, we don't think American Axle & Manufacturing Holdings (NYSE:AXL) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on American Axle & Manufacturing Holdings is:

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

0.066 = US$265m ÷ (US$5.3b - US$1.3b) (Based on the trailing twelve months to September 2024).

So, American Axle & Manufacturing Holdings has an ROCE of 6.6%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 11%.

See our latest analysis for American Axle & Manufacturing Holdings

Above you can see how the current ROCE for American Axle & Manufacturing Holdings 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 American Axle & Manufacturing Holdings for free.

What Can We Tell From American Axle & Manufacturing Holdings' ROCE Trend?

We're a bit concerned with the trends, because the business is applying 34% less capital than it was five years ago and returns on that capital have stayed flat. When a company effectively decreases its assets base, it's not usually a sign to be optimistic on that company. Not only that, but the low returns on this capital mentioned earlier would leave most investors unimpressed.

The Key Takeaway

It's a shame to see that American Axle & Manufacturing Holdings is effectively shrinking in terms of its capital base. And investors appear hesitant that the trends will pick up because the stock has fallen 46% in the last five years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you want to know some of the risks facing American Axle & Manufacturing Holdings we've found 2 warning signs (1 is concerning!) that you should be aware of before investing here.

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.

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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.