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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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of Ferguson Enterprises (NYSE:FERG) looks great, so lets see what the trend can tell us.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Ferguson Enterprises, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.23 = US$2.6b ÷ (US$17b - US$5.2b) (Based on the trailing twelve months to July 2024).
Therefore, Ferguson Enterprises has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Trade Distributors industry average of 12%.
Check out our latest analysis for Ferguson Enterprises
Above you can see how the current ROCE for Ferguson Enterprises compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Ferguson Enterprises for free.
What Does the ROCE Trend For Ferguson Enterprises Tell Us?
Ferguson Enterprises is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 23%. Basically the business is earning more per dollar of capital invested and in addition to that, 58% more capital is being employed now too. So we're very much inspired by what we're seeing at Ferguson Enterprises thanks to its ability to profitably reinvest capital.
Our Take On Ferguson Enterprises' ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Ferguson Enterprises has. Since the stock has returned a staggering 153% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
If you want to continue researching Ferguson Enterprises, you might be interested to know about the 3 warning signs that our analysis has discovered.