Yahoo Finance Here's What To Make Of Fortis' (TSE:FTS) Decelerating Rates Of Return
If you're looking for a multi-bagger, there's a few things to 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Fortis (TSE:FTS), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Fortis, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.047 = CA$2.7b ÷ (CA$64b - CA$6.1b) (Based on the trailing twelve months to September 2022).
Therefore, Fortis has an ROCE of 4.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.6%.
Check out our latest analysis for Fortis
In the above chart we have measured Fortis' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From Fortis' ROCE Trend?
There are better returns on capital out there than what we're seeing at Fortis. Over the past five years, ROCE has remained relatively flat at around 4.7% and the business has deployed 35% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
The Bottom Line
Long story short, while Fortis has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 52% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
If you want to know some of the risks facing Fortis we've found 2 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.
While Fortis 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.
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