Returns Are Gaining Momentum At FutureFuel (NYSE:FF)
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at FutureFuel (NYSE:FF) so let's look a bit deeper.
Return On Capital Employed (ROCE): What Is It?
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 FutureFuel:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = US$45m ÷ (US$373m - US$54m) (Based on the trailing twelve months to March 2023).
So, FutureFuel has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 11% it's much better.
See our latest analysis for FutureFuel
Historical performance is a great place to start when researching a stock so above you can see the gauge for FutureFuel's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of FutureFuel, check out these free graphs here.
So How Is FutureFuel's ROCE Trending?
FutureFuel has not disappointed in regards to ROCE growth. The data shows that returns on capital have increased by 45% over the trailing five years. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, FutureFuel appears to been achieving more with less, since the business is using 24% less capital to run its operation. FutureFuel may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
Our Take On FutureFuel's ROCE
In the end, FutureFuel has proven it's capital allocation skills are good with those higher returns from less amount of capital. Considering the stock has delivered 15% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.
One final note, you should learn about the 2 warning signs we've spotted with FutureFuel (including 1 which shouldn't be ignored) .
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.
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