In This Article:
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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. And in light of that, the trends we're seeing at Fortescue's (ASX:FMG) look very promising so lets take a look.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Fortescue, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.35 = US$9.6b ÷ (US$30b - US$2.5b) (Based on the trailing twelve months to December 2023).
So, Fortescue has an ROCE of 35%. That's a fantastic return and not only that, it outpaces the average of 11% earned by companies in a similar industry.
See our latest analysis for Fortescue
In the above chart we have measured Fortescue's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Fortescue for free.
What The Trend Of ROCE Can Tell Us
Fortescue is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 35%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 65%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
In Conclusion...
In summary, it's great to see that Fortescue can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 375% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Fortescue can keep these trends up, it could have a bright future ahead.
Fortescue does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant...