Returns At Fluor (NYSE:FLR) Are On The Way Up

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. 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, we've noticed some promising trends at Fluor (NYSE:FLR) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

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 Fluor is:

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

0.044 = US$158m ÷ (US$6.8b - US$3.2b) (Based on the trailing twelve months to December 2022).

So, Fluor has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 8.9%.

Check out our latest analysis for Fluor

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, you can check out the forecasts from the analysts covering Fluor here for free.

The Trend Of ROCE

While the ROCE is still rather low for Fluor, we're glad to see it heading in the right direction. The data shows that returns on capital have increased by 168% over the trailing five years. The company is now earning US$0.04 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 37% less than it was five years ago, which can be indicative of a business that's improving its efficiency. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

On a separate but related note, it's important to know that Fluor has a current liabilities to total assets ratio of 47%, 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.

What We Can Learn From Fluor's ROCE

In the end, Fluor has proven it's capital allocation skills are good with those higher returns from less amount of capital. And since the stock has fallen 32% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

If you want to continue researching Fluor, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Fluor may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.