If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. And in light of that, the trends we're seeing at Fortescue Metals Group's (ASX:FMG) look very promising so lets take a look.
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 Fortescue Metals Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.33 = US$6.9b ÷ (US$23b - US$2.8b) (Based on the trailing twelve months to June 2020).
So, Fortescue Metals Group has an ROCE of 33%. That's a fantastic return and not only that, it outpaces the average of 9.3% earned by companies in a similar industry.
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?
Fortescue Metals Group's ROCE growth is quite impressive. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 576% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
The Bottom Line
To sum it up, Fortescue Metals Group is collecting higher returns from the same amount of capital, and that's impressive. And a remarkable 2,476% total return over the last five years tells us that investors are expecting more good things to come in the future. 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.
If you want to know some of the risks facing Fortescue Metals Group we've found 3 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.
Fortescue Metals Group is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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