If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Fletcher Building (NZSE:FBU), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Fletcher Building:

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

0.095 = NZ$672m ÷ (NZ$8.9b - NZ$1.9b) (Based on the trailing twelve months to December 2023).

Thus, Fletcher Building has an ROCE of 9.5%.  In absolute terms, that's a low return but it's around the Building industry average of 11%.

View our latest analysis for Fletcher Building  roce

In the above chart we have measured Fletcher Building'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 freeanalyst report for Fletcher Building .

What The Trend Of ROCE Can Tell Us

The returns on capital haven't changed much for Fletcher Building in recent years. Over the past five years, ROCE has remained relatively flat at around 9.5% and the business has deployed 24% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Key Takeaway

Long story short, while Fletcher Building has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has declined 15% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Like most companies, Fletcher Building does come with some risks, and we've found 3 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this freelist 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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