Will the Promising Trends At Forterra (NASDAQ:FRTA) Continue?
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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 Forterra's (NASDAQ:FRTA) returns on capital, so let's have a look.
Understanding 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 Forterra is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.077 = US$117m ÷ (US$1.8b - US$256m) (Based on the trailing twelve months to June 2020).
Thus, Forterra has an ROCE of 7.7%. On its own, that's a low figure but it's around the 9.3% average generated by the Basic Materials industry.
Check out our latest analysis for Forterra
Above you can see how the current ROCE for Forterra 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 report for Forterra.
What Does the ROCE Trend For Forterra Tell Us?
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 7.7%. Basically the business is earning more per dollar of capital invested and in addition to that, 105% more capital is being employed now too. So we're very much inspired by what we're seeing at Forterra thanks to its ability to profitably reinvest capital.
Our Take On Forterra's ROCE
All in all, it's terrific to see that Forterra is reaping the rewards from prior investments and is growing its capital base. And a remarkable 300% total return over the last three years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.
One final note, you should learn about the 3 warning signs we've spotted with Forterra (including 1 which is is a bit unpleasant) .
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
This article by Simply Wall St is general in nature. 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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