Investors Shouldn't Overlook Fortescue Metals Group's (ASX:FMG) Impressive Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Speaking of which, we noticed some great changes in Fortescue Metals Group's (ASX:FMG) returns on capital, so let's have a look.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Fortescue Metals Group, this is the formula:

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

0.35 = US$9.1b ÷ (US$28b - US$2.4b) (Based on the trailing twelve months to June 2022).

Therefore, Fortescue Metals Group has an ROCE of 35%. That's a fantastic return and not only that, it outpaces the average of 8.0% earned by companies in a similar industry.

Check out our latest analysis for Fortescue Metals Group

Above you can see how the current ROCE for Fortescue Metals Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Fortescue Metals Group.

So How Is Fortescue Metals Group's ROCE Trending?

We like the trends that we're seeing from Fortescue Metals Group. The data shows that returns on capital have increased substantially over the last five years to 35%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 53%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

In Conclusion...

To sum it up, Fortescue Metals Group has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 532% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Fortescue Metals Group can keep these trends up, it could have a bright future ahead.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Fortescue Metals Group (of which 1 shouldn't be ignored!) that you should know about.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.