The Returns At FutureFuel (NYSE:FF) Aren't Growing

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. In light of that, when we looked at FutureFuel (NYSE:FF) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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 FutureFuel is:

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

0.11 = US$35m ÷ (US$354m - US$45m) (Based on the trailing twelve months to June 2023).

Therefore, FutureFuel has an ROCE of 11%. That's a pretty standard return and it's in line with the industry average of 11%.

See our latest analysis for FutureFuel

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating FutureFuel's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For FutureFuel Tell Us?

We're a bit concerned with the trends, because the business is applying 27% less capital than it was five years ago and returns on that capital have stayed flat. This indicates to us that assets are being sold and thus the business is likely shrinking, which you'll remember isn't the typical ingredients for an up-and-coming multi-bagger. You could assume that if this continues, the business will be smaller in a few year time, so probably not a multi-bagger.

What We Can Learn From FutureFuel's ROCE

Overall, we're not ecstatic to see FutureFuel reducing the amount of capital it employs in the business. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. Therefore based on the analysis done in this article, we don't think FutureFuel has the makings of a multi-bagger.

One more thing: We've identified 3 warning signs with FutureFuel (at least 2 which are a bit unpleasant) , and understanding these would certainly be useful.

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.

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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.