Stock Analysis

Capital Allocation Trends At Fluor (NYSE:FLR) Aren't Ideal

NYSE:FLR
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Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, Fluor (NYSE:FLR) we aren't filled with optimism, but let's investigate further.

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. Analysts use this formula to calculate it for Fluor:

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

0.074 = US$245m ÷ (US$6.5b - US$3.2b) (Based on the trailing twelve months to March 2022).

Thus, Fluor has an ROCE of 7.4%. On its own, that's a low figure but it's around the 8.1% average generated by the Construction industry.

See our latest analysis for Fluor

roce
NYSE:FLR Return on Capital Employed June 8th 2022

In the above chart we have measured Fluor'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 Fluor here for free.

What Can We Tell From Fluor's ROCE Trend?

We aren't inspired by the trend, given ROCE has reduced by 26% over the last five years and Fluor is applying -40% less capital in the business, even after the capital raising they conducted (prior to their latest reported figures).

On a separate but related note, it's important to know that Fluor has a current liabilities to total assets ratio of 49%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

In summary, it's unfortunate that Fluor is shrinking its capital base and also generating lower returns. Investors haven't taken kindly to these developments, since the stock has declined 33% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing to note, we've identified 1 warning sign with Fluor and understanding this should be part of your investment process.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

Valuation is complex, but we're helping make it simple.

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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.