What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Fortis (TSE:FTS), we don't think it's current trends fit the mold of a multi-bagger.
Understanding 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. Analysts use this formula to calculate it for Fortis:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.052 = CA$3.2b ÷ (CA$68b - CA$6.6b) (Based on the trailing twelve months to March 2024).
Thus, Fortis has an ROCE of 5.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.8%.
View our latest analysis for Fortis
Above you can see how the current ROCE for Fortis 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 Fortis for free.
What The Trend Of ROCE Can Tell Us
There are better returns on capital out there than what we're seeing at Fortis. The company has consistently earned 5.2% for the last five years, and the capital employed within the business has risen 26% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
The Key Takeaway
In conclusion, Fortis has been investing more capital into the business, but returns on that capital haven't increased. Unsurprisingly, the stock has only gained 27% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
On a final note, we found 2 warning signs for Fortis (1 is a bit unpleasant) you should be aware of.
While Fortis isn't earning the highest return, check out this free list of companies that are 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
About TSX:FTS
Fortis
Operates as an electric and gas utility company in Canada, the United States, and the Caribbean countries.
Solid track record, good value and pays a dividend.
