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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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. With that in mind, we've noticed some promising trends at Fortune Brands Home & Security (NYSE:FBHS) so let's look a bit deeper.
Return On Capital Employed (ROCE): What is it?
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. Analysts use this formula to calculate it for Fortune Brands Home & Security:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = US$1.1b ÷ (US$7.9b - US$1.5b) (Based on the trailing twelve months to September 2021).
So, Fortune Brands Home & Security has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 14% generated by the Building industry.
Above you can see how the current ROCE for Fortune Brands Home & Security 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 Fortune Brands Home & Security here for free.
How Are Returns Trending?
The trends we've noticed at Fortune Brands Home & Security are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 17%. 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 43%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
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 Fortune Brands Home & Security has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 94% return over the last five years. In light of that, we think it's worth looking further into this stock because if Fortune Brands Home & Security can keep these trends up, it could have a bright future ahead.
If you want to continue researching Fortune Brands Home & Security, you might be interested to know about the 1 warning sign that our analysis has discovered.
While Fortune Brands Home & Security may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.