Why The 41% Return On Capital At Ferrexpo (LON:FXPO) Should Have Your Attention

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Ferrexpo's (LON:FXPO) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

0.41 = US$684m ÷ (US$2.0b - US$296m) (Based on the trailing twelve months to December 2020).

So, Ferrexpo has an ROCE of 41%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 14%.

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.

What Can We Tell From Ferrexpo's ROCE Trend?

We like the trends that we're seeing from Ferrexpo. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 41%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 73%. So we're very much inspired by what we're seeing at Ferrexpo thanks to its ability to profitably reinvest capital.

What We Can Learn From 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. Since the stock has returned a staggering 1,726% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a final note, we found 3 warning signs for Ferrexpo (1 makes us a bit uncomfortable) you should be aware of.

Ferrexpo 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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