Freeport-McMoRan (NYSE:FCX) Is Experiencing Growth In Returns On Capital
Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Freeport-McMoRan's (NYSE:FCX) returns on capital, so let's have 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. The formula for this calculation on Freeport-McMoRan is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = US$7.7b ÷ (US$50b - US$6.0b) (Based on the trailing twelve months to September 2022).
Therefore, Freeport-McMoRan has an ROCE of 18%. That's a pretty standard return and it's in line with the industry average of 18%.
Check out our latest analysis for Freeport-McMoRan
In the above chart we have measured Freeport-McMoRan's 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 Freeport-McMoRan's ROCE Trend?
The trends we've noticed at Freeport-McMoRan are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 18%. Basically the business is earning more per dollar of capital invested and in addition to that, 38% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
The Bottom Line On Freeport-McMoRan's ROCE
To sum it up, Freeport-McMoRan has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Freeport-McMoRan can keep these trends up, it could have a bright future ahead.
Freeport-McMoRan does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit concerning...
While Freeport-McMoRan 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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