Stock Analysis

Federal Signal (NYSE:FSS) Is Doing The Right Things To Multiply Its Share Price

NYSE:FSS
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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Federal Signal (NYSE:FSS) looks quite promising in regards to its trends of return on capital.

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 Federal Signal is:

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

0.11 = US$136m ÷ (US$1.4b - US$180m) (Based on the trailing twelve months to June 2022).

So, Federal Signal has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 10% generated by the Machinery industry.

View our latest analysis for Federal Signal

roce
NYSE:FSS Return on Capital Employed September 19th 2022

In the above chart we have measured Federal Signal's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Federal Signal.

What Does the ROCE Trend For Federal Signal Tell Us?

We like the trends that we're seeing from Federal Signal. The data shows that returns on capital have increased substantially over the last five years to 11%. The amount of capital employed has increased too, by 46%. So we're very much inspired by what we're seeing at Federal Signal thanks to its ability to profitably reinvest capital.

What We Can Learn From Federal Signal's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Federal Signal has. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Federal Signal can keep these trends up, it could have a bright future ahead.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation that compares the share price and estimated value.

While Federal Signal 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 Federal Signal 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.

View the Free Analysis

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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.