What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 Ferguson Enterprises' (NYSE:FERG) ROCE trend, we were very happy with what we saw.

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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 Ferguson Enterprises:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.22 = US$2.5b ÷ (US$17b - US$5.1b) (Based on the trailing twelve months to January 2025).

Therefore, Ferguson Enterprises has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Trade Distributors industry average of 11%.

View our latest analysis for Ferguson Enterprises NYSE:FERG Return on Capital Employed May 2nd 2025

In the above chart we have measured Ferguson Enterprises' 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 freeanalyst report for Ferguson Enterprises .

What Does the ROCE Trend For Ferguson Enterprises Tell Us?

In terms of Ferguson Enterprises' history of ROCE, it's quite impressive. Over the past five years, ROCE has remained relatively flat at around 22% and the business has deployed 41% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Ferguson Enterprises can keep this up, we'd be very optimistic about its future.

The Bottom Line

In summary, we're delighted to see that Ferguson Enterprises has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And long term investors would be thrilled with the 163% return they've received over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

Story Continues

Ferguson Enterprises does have some risks though, and we've spotted  2 warning signs for Ferguson Enterprises that you might be interested in.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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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