The Returns At Fletcher Building (NZSE:FBU) Aren't Growing

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Fletcher Building (NZSE:FBU) and its ROCE trend, we weren't exactly thrilled.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Fletcher Building:

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

0.095 = NZ$672m ÷ (NZ$8.9b - NZ$1.9b) (Based on the trailing twelve months to December 2023).

Therefore, Fletcher Building has an ROCE of 9.5%. On its own that's a low return on capital but it's in line with the industry's average returns of 10%.

Check out our latest analysis for Fletcher Building

Above you can see how the current ROCE for Fletcher Building 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 Fletcher Building for free.

What Can We Tell From Fletcher Building's ROCE Trend?

In terms of Fletcher Building's historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 9.5% and the business has deployed 24% more capital into its operations. 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.

Our Take On Fletcher Building's ROCE

In summary, Fletcher Building has simply been reinvesting capital and generating the same low rate of return as before. And with the stock having returned a mere 1.7% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One more thing, we've spotted 3 warning signs facing Fletcher Building that you might find interesting.

While Fletcher Building 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.