Stock Analysis

Fluor's (NYSE:FLR) Returns On Capital Not Reflecting Well On The Business

NYSE:FLR
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When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. 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?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

0.032 = US$134m ÷ (US$7.9b - US$3.7b) (Based on the trailing twelve months to June 2021).

Therefore, Fluor has an ROCE of 3.2%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 9.6%.

View our latest analysis for Fluor

roce
NYSE:FLR Return on Capital Employed August 12th 2021

Above you can see how the current ROCE for Fluor compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Fluor.

What Can We Tell From Fluor's ROCE Trend?

We aren't inspired by the trend, given ROCE has reduced by 79% over the last five years and Fluor is applying -25% less capital in the business, even after the capital raising they conducted (prior to their latest reported figures).

On a side note, Fluor's current liabilities are still rather high at 48% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Fluor's ROCE

To see Fluor reducing the capital employed in the business in tandem with diminishing returns, is concerning. It should come as no surprise then that the stock has fallen 62% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing, we've spotted 1 warning sign facing Fluor that you might find interesting.

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.

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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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