Why We Like The Returns At Fortescue Metals Group (ASX:FMG)

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. 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)?

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. The formula for this calculation on Fortescue Metals Group is:

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

0.33 = US$8.5b ÷ (US$28b - US$2.1b) (Based on the trailing twelve months to December 2022).

Therefore, Fortescue Metals Group has an ROCE of 33%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 10%.

View 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.

What The Trend Of ROCE Can Tell Us

We like the trends that we're seeing from Fortescue Metals Group. Over the last five years, returns on capital employed have risen substantially to 33%. The amount of capital employed has increased too, by 52%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

What We Can Learn From Fortescue Metals Group's ROCE

In summary, it's great to see that Fortescue Metals Group can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. 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.

On a final note, we found 2 warning signs for Fortescue Metals Group (1 can't be ignored) you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.