American Express Earnings Perspective: Return On Capital Employed

American Express Earnings Perspective: Return On Capital Employed

According to Benzinga Pro data American Express AXP posted a 6.43% decrease in earnings from Q1. Sales, however, increased by 14.15% over the previous quarter to $13.39 billion. Despite the increase in sales this quarter, the decrease in earnings may suggest American Express is not utilizing their capital as effectively as possible. American Express reached earnings of $2.10 billion and sales of $11.73 billion in Q1.

Why Is ROCE Significant?

Return on Capital Employed is a measure of yearly pre-tax profit relative to capital employed by a business. Changes in earnings and sales indicate shifts in a company's ROCE. A higher ROCE is generally representative of successful growth of a company and is a sign of higher earnings per share in the future. A low or negative ROCE suggests the opposite. In Q2, American Express posted an ROCE of 0.08%.

Keep in mind, while ROCE is a good measure of a company's recent performance, it is not a highly reliable predictor of a company's earnings or sales in the near future.

ROCE is a powerful metric for comparing the effectiveness of capital allocation for similar companies. A relatively high ROCE shows American Express is potentially operating at a higher level of efficiency than other companies in its industry. If the company is generating high profits with its current level of capital, some of that money can be reinvested in more capital which will generally lead to higher returns and, ultimately, earnings per share (EPS) growth.

For American Express, the positive return on capital employed ratio of 0.08% suggests that management is allocating their capital effectively. Effective capital allocation is a positive indicator that a company will achieve more durable success and favorable long-term returns.

Analyst Predictions

American Express reported Q2 earnings per share at $2.57/share, which beat analyst predictions of $2.41/share.

This article was generated by Benzinga's automated content engine and reviewed by an editor.

Posted In: BZI-ROCEEarnings