Some Investors May Be Worried About Comfort Systems USA's (NYSE:FIX) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Comfort Systems USA (NYSE:FIX) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Comfort Systems USA, this is the formula:

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

0.14 = US$187m ÷ (US$2.2b - US$837m) (Based on the trailing twelve months to December 2021).

Therefore, Comfort Systems USA has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Construction industry average of 9.2% it's much better.

View our latest analysis for Comfort Systems USA

In the above chart we have measured Comfort Systems USA's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Comfort Systems USA here for free.

How Are Returns Trending?

In terms of Comfort Systems USA's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 14% from 26% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

To conclude, we've found that Comfort Systems USA is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 162% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Comfort Systems USA does have some risks though, and we've spotted 1 warning sign for Comfort Systems USA that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.