What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at FedEx (NYSE:FDX) and its ROCE trend, we weren't exactly thrilled.
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. The formula for this calculation on FedEx is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.069 = US$5.0b ÷ (US$86b - US$14b) (Based on the trailing twelve months to February 2023).
Therefore, FedEx has an ROCE of 6.9%. In absolute terms, that's a low return and it also under-performs the Logistics industry average of 12%.
View 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.
SWOT Analysis for FedEx
- Debt is well covered by earnings and cashflows.
- Dividends are covered by earnings and cash flows.
- Earnings declined over the past year.
- Dividend is low compared to the top 25% of dividend payers in the Logistics market.
- Expensive based on P/E ratio and estimated fair value.
- Annual earnings are forecast to grow for the next 4 years.
- Annual earnings are forecast to grow slower than the American market.
What Does the ROCE Trend For FedEx Tell Us?
On the surface, the trend of ROCE at FedEx doesn't inspire confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 6.9%. 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
Our Take On FedEx's ROCE
To conclude, we've found that FedEx is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 1.0% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
One more thing to note, we've identified 2 warning signs with FedEx and understanding these should be part of your investment process.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.
