Fiat Chrysler Automobiles NV (BIT:FCA)'s Return on Capital

I am writing today to help inform people who are new to the stock market and looking to gauge the potential return on investment in Fiat Chrysler Automobiles NV (BIT:FCA).

If you purchase a FCA share you are effectively becoming a partner with many other shareholders. Your equity share is granted in return for the capital provided to the business to operate, and in order for an investment to be successful the business has to create earnings from the funds that make up this capital. You need to pay attention to this because your return on investment is linked to dividends and internal investments to improve the business, which can only occur if the company is expected to produce adequate earnings with the capital that has been provided. Thus, to understand how your money can grow by investing in Fiat Chrysler Automobiles, you need to look at what the company returns to owners for the use of their capital, which can be done in many ways but today we will use return on capital employed (ROCE).

View our latest analysis for Fiat Chrysler Automobiles

Fiat Chrysler Automobiles's Return On Capital Employed

When you choose to invest in a company, there is an opportunity cost because that money could’ve been invested elsewhere. The cost of missing out on another opportunity comes in the form of the potential long term gain you could've received, which is dependent on the gap between the return on capital you could've achieved and that of the company you invested in. Hence, capital returns are very important, and should be examined before you invest in conjunction with a certain benchmark that represents the minimum return you require to be compensated for the risk of missing out on other potentially lucrative investments. We'll look at Fiat Chrysler Automobiles’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. I have calculated Fiat Chrysler Automobiles’s ROCE for you below:

The calculation above shows that FCA’s earnings were 12.25% of capital employed. This makes Fiat Chrysler Automobiles slightly mediocre when compared to a robust 15% ROCE yardstick. So if this rate continues in to the future, investor capital will be able to compound over time, but still may be missing out on some potential growth elsewhere.

What is causing this?

Although Fiat Chrysler Automobiles is in an unfavourable position, you should know that this could change if the company is able to increase earnings on the same capital base or find new efficiencies that require less capital to produce earnings. Because of this, it is important to look beyond the final value of FCA’s ROCE and understand what is happening to the individual components. Looking at the past 3 year period shows us that FCA boosted investor return on capital employed from 2.17%. We can see that earnings have increased from €1.51b to €6.23b whilst the amount of capital employed has declined because of a fall in total assets and a larger reliance on current liabilities (increased borrowing to fund operations) , which is an indication that Fiat Chrysler Automobiles has increased the ROCE for investors by producing more earnings and using less capital.

Next Steps

Although Fiat Chrysler Automobiles’s ROCE is currently below the acceptable benchmark, the company has triggered an upward trend over the recent past which could signal an opportunity for a solid return on investment in the long term. Before making any decisions, ROCE does not tell the whole picture so you need to pay attention to other fundamentals like future prospects and valuation to determine if an opportunity exists that isn't made apparent by looking at past data. If you’re building your portfolio and want to take a deeper look, I’ve added a few links below that will help you further evaluate FCA or move on to other alternatives.

1. Future Outlook: What are well-informed industry analysts predicting for FCA’s future growth? Take a look at our free research report of analyst consensus for FCA’s outlook.
2. Valuation: What is FCA worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether FCA is currently undervalued by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article 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.