Returns At Fortis (TSE:FTS) Appear To Be Weighed Down

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Fortis (TSE:FTS), we don't think it's current trends fit the mold of a multi-bagger.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Fortis, this is the formula:

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

0.052 = CA$3.1b ÷ (CA$66b - CA$6.0b) (Based on the trailing twelve months to December 2023).

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%.

See 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.

How Are Returns Trending?

In terms of Fortis' historical ROCE trend, it doesn't exactly demand attention. The company has employed 23% more capital in the last five years, and the returns on that capital have remained stable at 5.2%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Key Takeaway

In summary, Fortis has simply been reinvesting capital and generating the same low rate of return as before. Unsurprisingly, the stock has only gained 32% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Fortis does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is significant...

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.