Fortis' (TSE:FTS) Returns Have Hit A Wall
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Fortis (TSE:FTS) and its ROCE trend, we weren't exactly thrilled.
What Is Return On Capital Employed (ROCE)?
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 Fortis is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.052 = CA$3.1b ÷ (CA$66b - CA$6.0b) (Based on the trailing twelve months to December 2023).
Thus, Fortis has an ROCE of 5.2%. Even though it's in line with the industry average of 4.8%, it's still a low return by itself.
See our latest analysis for Fortis
Above you can see how the current ROCE for Fortis compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Fortis .
What The Trend Of ROCE Can Tell Us
The returns on capital haven't changed much for Fortis in recent years. Over the past five years, ROCE has remained relatively flat at around 5.2% and the business has deployed 23% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
In Conclusion...
As we've seen above, Fortis' returns on capital haven't increased but it is reinvesting in the business. Unsurprisingly, the stock has only gained 30% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
Fortis does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...
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.
