Slowing Rates Of Return At Flowserve (NYSE:FLS) Leave Little Room For Excitement

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Although, when we looked at Flowserve (NYSE:FLS), it didn't seem to tick all of these boxes.

What Is 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. Analysts use this formula to calculate it for Flowserve:

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

0.063 = US$222m ÷ (US$4.8b - US$1.2b) (Based on the trailing twelve months to December 2022).

So, Flowserve has an ROCE of 6.3%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 12%.

View our latest analysis for Flowserve

Above you can see how the current ROCE for Flowserve 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 Flowserve here for free.

What Does the ROCE Trend For Flowserve Tell Us?

There hasn't been much to report for Flowserve's returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if Flowserve doesn't end up being a multi-bagger in a few years time. With fewer investment opportunities, it makes sense that Flowserve has been paying out a decent 37% of its earnings to shareholders. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.

The Bottom Line

In a nutshell, Flowserve has been trudging along with the same returns from the same amount of capital over the last five years. And in the last five years, the stock has given away 18% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One more thing: We've identified 3 warning signs with Flowserve (at least 1 which is a bit concerning) , and understanding them would certainly be useful.

While Flowserve 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.