Why You Should Care About Fastenal's (NASDAQ:FAST) Strong Returns On Capital
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. That's why when we briefly looked at Fastenal's (NASDAQ:FAST) ROCE trend, we were very happy with what we saw.
Return On Capital Employed (ROCE): What Is It?
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 Fastenal, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.36 = US$1.4b ÷ (US$4.6b - US$849m) (Based on the trailing twelve months to June 2022).
Thus, Fastenal has an ROCE of 36%. That's a fantastic return and not only that, it outpaces the average of 15% earned by companies in a similar industry.
See our latest analysis for Fastenal
In the above chart we have measured Fastenal'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 report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
Fastenal deserves to be commended in regards to it's returns. The company has consistently earned 36% for the last five years, and the capital employed within the business has risen 49% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Fastenal can keep this up, we'd be very optimistic about its future.
What We Can Learn From Fastenal's ROCE
Fastenal has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. And long term investors would be thrilled with the 129% return they've received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
Fastenal does have some risks though, and we've spotted 1 warning sign for Fastenal that you might be interested in.
Fastenal is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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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