Returns On Capital At Federal Signal (NYSE:FSS) Have Hit The Brakes

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. That's why when we briefly looked at Federal Signal's (NYSE:FSS) ROCE trend, we were pretty happy with what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Federal Signal is:

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

0.17 = US$239m ÷ (US$1.7b - US$211m) (Based on the trailing twelve months to March 2024).

Therefore, Federal Signal has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 13% generated by the Machinery industry.

See our latest analysis for Federal Signal

Above you can see how the current ROCE for Federal Signal 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 Federal Signal for free.

How Are Returns Trending?

While the returns on capital are good, they haven't moved much. The company has employed 59% more capital in the last five years, and the returns on that capital have remained stable at 17%. Since 17% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

The Key Takeaway

To sum it up, Federal Signal has simply been reinvesting capital steadily, at those decent rates of return. On top of that, the stock has rewarded shareholders with a remarkable 268% return to those who've held over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

If you're still interested in Federal Signal it's worth checking out our FREE intrinsic value approximation for FSS to see if it's trading at an attractive price in other respects.

While Federal Signal 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.