Under The Bonnet, Ferrexpo's (LON:FXPO) Returns Look Impressive

What trends should we look for it we want to identify stocks that can 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. With that in mind, the ROCE of Ferrexpo (LON:FXPO) looks great, so lets see what the trend can tell us.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Ferrexpo is:

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

0.29 = US$457m ÷ (US$1.8b - US$267m) (Based on the trailing twelve months to June 2020).

So, Ferrexpo has an ROCE of 29%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 12%.

View our latest analysis for Ferrexpo

Above you can see how the current ROCE for Ferrexpo 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 Ferrexpo here for free.

How Are Returns Trending?

We like the trends that we're seeing from Ferrexpo. The data shows that returns on capital have increased substantially over the last five years to 29%. Basically the business is earning more per dollar of capital invested and in addition to that, 44% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

One more thing to note, Ferrexpo has decreased current liabilities to 15% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Bottom Line On Ferrexpo's ROCE

All in all, it's terrific to see that Ferrexpo is reaping the rewards from prior investments and is growing its capital base. And a remarkable 1,467% 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 Ferrexpo can keep these trends up, it could have a bright future ahead.

One more thing: We've identified 3 warning signs with Ferrexpo (at least 1 which is a bit concerning) , and understanding these would certainly be useful.

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. 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.
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