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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Freeport-McMoRan (NYSE:FCX) and its ROCE trend, we weren't exactly thrilled.
Understanding Return On Capital Employed (ROCE)
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. Analysts use this formula to calculate it for Freeport-McMoRan:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = US$6.1b ÷ (US$52b - US$4.9b) (Based on the trailing twelve months to September 2023).
Thus, Freeport-McMoRan has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 10% generated by the Metals and Mining industry.
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'd like, you can check out the forecasts from the analysts covering Freeport-McMoRan here for free.
What Does the ROCE Trend For Freeport-McMoRan Tell Us?
On the surface, the trend of ROCE at Freeport-McMoRan doesn't inspire confidence. To be more specific, ROCE has fallen from 17% over the last five years. However it looks like Freeport-McMoRan might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line On Freeport-McMoRan's ROCE
Bringing it all together, while we're somewhat encouraged by Freeport-McMoRan's reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 255% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
On a final note, we've found 2 warning signs for Freeport-McMoRan that we think you should be aware of.
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.