Returns At Federal Signal (NYSE:FSS) Are On The Way Up
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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So when we looked at Federal Signal (NYSE:FSS) and its trend of ROCE, we really liked what we saw.
What Is 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. Analysts use this formula to calculate it for Federal Signal:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = US$141m ÷ (US$1.5b - US$181m) (Based on the trailing twelve months to September 2022).
Therefore, Federal Signal has an ROCE of 11%. By itself that's a normal return on capital and it's in line with the industry's average returns of 11%.
Check out our latest analysis for Federal Signal
In the above chart we have measured Federal Signal'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 Federal Signal here for free.
So How Is Federal Signal's ROCE Trending?
Investors would be pleased with what's happening at Federal Signal. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 11%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 48%. So we're very much inspired by what we're seeing at Federal Signal thanks to its ability to profitably reinvest capital.
The Bottom Line
To sum it up, Federal Signal has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 158% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
One more thing to note, we've identified 1 warning sign with Federal Signal and understanding it should be part of your investment process.
While Federal Signal 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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