What Do The Returns On Capital At Foundation Building Materials (NYSE:FBM) Tell Us?
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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Foundation Building Materials (NYSE:FBM), we don't think it's current trends fit the mold of a multi-bagger.
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. To calculate this metric for Foundation Building Materials, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.071 = US$93m ÷ (US$1.5b - US$240m) (Based on the trailing twelve months to March 2020).
So, Foundation Building Materials has an ROCE of 7.2%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 9.1%.
See our latest analysis for Foundation Building Materials
Above you can see how the current ROCE for Foundation Building Materials 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 Foundation Building Materials here for free.
How Are Returns Trending?
There are better returns on capital out there than what we're seeing at Foundation Building Materials. Over the past five years, ROCE has remained relatively flat at around 7.2% and the business has deployed 304% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
In Conclusion...
As we've seen above, Foundation Building Materials' returns on capital haven't increased but it is reinvesting in the business. Although the market must be expecting these trends to improve because the stock has gained 27% over the last three years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
Foundation Building Materials does have some risks, we noticed 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.
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.
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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