Under The Bonnet, Fortinet's (NASDAQ:FTNT) Returns Look Impressive
What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Speaking of which, we noticed some great changes in Fortinet's (NASDAQ:FTNT) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Fortinet, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.35 = US$1.2b ÷ (US$7.3b - US$3.7b) (Based on the trailing twelve months to December 2023).
Therefore, Fortinet has an ROCE of 35%. That's a fantastic return and not only that, it outpaces the average of 7.5% earned by companies in a similar industry.
Check out our latest analysis for Fortinet
In the above chart we have measured Fortinet's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Fortinet .
How Are Returns Trending?
Investors would be pleased with what's happening at Fortinet. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 35%. Basically the business is earning more per dollar of capital invested and in addition to that, 94% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 51% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.
The Key Takeaway
To sum it up, Fortinet has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 292% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Fortinet can keep these trends up, it could have a bright future ahead.
If you want to know some of the risks facing Fortinet we've found 2 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.
