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If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So, when we ran our eye over Comfort Systems USA's (NYSE:FIX) trend of ROCE, we liked what we saw.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Comfort Systems USA is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = US$200m ÷ (US$1.7b - US$692m) (Based on the trailing twelve months to March 2021).
Thus, Comfort Systems USA has an ROCE of 20%. On its own, that's a standard return, however it's much better than the 9.5% generated by the Construction industry.
In the above chart we have measured Comfort Systems USA's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Comfort Systems USA.
What Does the ROCE Trend For Comfort Systems USA Tell Us?
The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 20% for the last five years, and the capital employed within the business has risen 155% in that time. 20% is a pretty standard return, and it provides some comfort knowing that Comfort Systems USA has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
Another thing to note, Comfort Systems USA has a high ratio of current liabilities to total assets of 40%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line On Comfort Systems USA's ROCE
To sum it up, Comfort Systems USA has simply been reinvesting capital steadily, at those decent rates of return. And long term investors would be thrilled with the 188% return they've received over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
On a final note, we found 3 warning signs for Comfort Systems USA (1 shouldn't be ignored) you should be aware of.
While Comfort Systems USA isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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