What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Fortive (NYSE:FTV), it didn't seem to tick all of these boxes.
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 Fortive is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.079 = US$1.1b ÷ (US$17b - US$2.9b) (Based on the trailing twelve months to June 2020).
So, Fortive has an ROCE of 7.9%. On its own, that's a low figure but it's around the 9.2% average generated by the Machinery industry.
Above you can see how the current ROCE for Fortive compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Does the ROCE Trend For Fortive Tell Us?
The trend of ROCE doesn't look fantastic because it's fallen from 21% five years ago, while the business's capital employed increased by 128%. Usually this isn't ideal, but given Fortive conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Fortive might not have received a full period of earnings contribution from it. Additionally, we found that Fortive's most recent EBIT figure is around the same as the prior year, so we'd attribute the drop in ROCE mostly to the capital raise.
The Bottom Line On Fortive's ROCE
Bringing it all together, while we're somewhat encouraged by Fortive's reinvestment in its own business, we're aware that returns are shrinking. And investors may be recognizing these trends since the stock has only returned a total of 13% to shareholders over the last three years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
One more thing, we've spotted 4 warning signs facing Fortive that you might find interesting.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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