Stock Analysis

Fluor (NYSE:FLR) Is Finding It Tricky To Allocate Its Capital

NYSE:FLR
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If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. On that note, looking into Fluor (NYSE:FLR), we weren't too upbeat about how things were going.

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. To calculate this metric for Fluor, this is the formula:

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

0.029 = US$106m ÷ (US$7.3b - US$3.6b) (Based on the trailing twelve months to September 2021).

Therefore, Fluor has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 8.5%.

See our latest analysis for Fluor

roce
NYSE:FLR Return on Capital Employed November 26th 2021

In the above chart we have measured Fluor's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Fluor's ROCE Trend?

The trend of ROCE doesn't look fantastic because it's fallen from 12% five years ago and the business is utilizing 33% less capital, even after their capital raise (conducted prior to the latest reporting period).

On a side note, Fluor's current liabilities are still rather high at 50% of total assets. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Fluor's ROCE

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 53% 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 it should be part of your investment process.

While Fluor isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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

Find out whether Fluor is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.

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