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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we’ve noticed some promising trends at FLEETCOR Technologies (NYSE:FLT) so let’s look a bit deeper.
Understanding 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. The formula for this calculation on FLEETCOR Technologies is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.16 = US$1.1b ÷ (US$11b – US$3.6b) (Based on the trailing twelve months to June 2020).
Therefore, FLEETCOR Technologies has an ROCE of 16%. In absolute terms, that’s a satisfactory return, but compared to the IT industry average of 10% it’s much better.
Above you can see how the current ROCE for FLEETCOR Technologies 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 FLEETCOR Technologies here for free.
So How Is FLEETCOR Technologies’ ROCE Trending?
FLEETCOR Technologies has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 51% in that same time. So it’s likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn’t changed considerably. The company is doing well in that sense, and it’s worth investigating what the management team has planned for long term growth prospects.
The Key Takeaway
To bring it all together, FLEETCOR Technologies has done well to increase the returns it’s generating from its capital employed. And with a respectable 62% awarded to those who held the stock over the last five years, you could argue that these trends are starting to get the attention they deserve. In light of that, we think it’s worth looking further into this stock because if FLEETCOR Technologies can keep these trends up, it could have a bright future ahead.
On a separate note, we’ve found 2 warning signs for FLEETCOR Technologies you’ll probably want to know about.
While FLEETCOR Technologies may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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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