Ferguson Enterprises (NYSE:FERG) Might Become A Compounding Machine

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of Ferguson Enterprises (NYSE:FERG) looks attractive right now, so lets see what the trend of returns can tell us.

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. The formula for this calculation on Ferguson Enterprises is:

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

0.22 = US$2.5b ÷ (US$17b - US$5.1b) (Based on the trailing twelve months to January 2025).

Therefore, Ferguson Enterprises has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Trade Distributors industry average of 11%.

View our latest analysis for Ferguson Enterprises

Above you can see how the current ROCE for Ferguson Enterprises compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Ferguson Enterprises .

What The Trend Of ROCE Can Tell Us

We'd be pretty happy with returns on capital like Ferguson Enterprises. The company has consistently earned 22% for the last five years, and the capital employed within the business has risen 41% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Ferguson Enterprises can keep this up, we'd be very optimistic about its future.

What We Can Learn From Ferguson Enterprises' ROCE

In summary, we're delighted to see that Ferguson Enterprises has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And long term investors would be thrilled with the 209% return they've received over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

Ferguson Enterprises does have some risks though, and we've spotted 2 warning signs for Ferguson Enterprises that you might be interested in.

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. 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.