Stock Analysis

Returns On Capital Are Showing Encouraging Signs At FutureFuel (NYSE:FF)

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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at FutureFuel (NYSE:FF) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on FutureFuel is:

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

0.059 = US$18m ÷ (US$356m - US$56m) (Based on the trailing twelve months to December 2022).

Thus, FutureFuel has an ROCE of 5.9%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 11%.

Check out our latest analysis for FutureFuel

NYSE:FF Return on Capital Employed March 16th 2023

Historical performance is a great place to start when researching a stock so above you can see the gauge for FutureFuel's ROCE against it's prior returns. If you're interested in investigating FutureFuel's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is FutureFuel's ROCE Trending?

FutureFuel has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 131%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Speaking of capital employed, the company is actually utilizing 23% less than it was five years ago, which can be indicative of a business that's improving its efficiency. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

In Conclusion...

In summary, it's great to see that FutureFuel has been able to turn things around and earn higher returns on lower amounts of capital. Since the stock has only returned 0.6% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

If you want to know some of the risks facing FutureFuel we've found 4 warning signs (1 is significant!) that you should be aware of before investing here.

While FutureFuel 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.

Valuation is complex, but we're helping make it simple.

Find out whether FutureFuel 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.

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