What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at FedEx (NYSE:FDX) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for FedEx:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.075 = US$5.4b ÷ (US$86b - US$14b) (Based on the trailing twelve months to November 2022).
Therefore, FedEx has an ROCE of 7.5%. In absolute terms, that's a low return and it also under-performs the Logistics industry average of 12%.
See our latest analysis for FedEx
Above you can see how the current ROCE for FedEx 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.
The Trend Of ROCE
On the surface, the trend of ROCE at FedEx doesn't inspire confidence. Over the last five years, returns on capital have decreased to 7.5% from 12% five years ago. However it looks like FedEx might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line On FedEx's ROCE
Bringing it all together, while we're somewhat encouraged by FedEx's reinvestment in its own business, we're aware that returns are shrinking. 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 FedEx has the makings of a multi-bagger.
FedEx does have some risks though, and we've spotted 2 warning signs for FedEx that you might be interested in.
While FedEx isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
About NYSE:FDX
FedEx
Provides transportation, e-commerce, and business services in the United States and internationally.
Established dividend payer with adequate balance sheet.
