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Highlights
- Fortescue (ASX:FMG) boasts a 31% return on capital employed (ROCE).
- Company has shown consistent growth in capital employed over the last five years.
- Strong historical returns make it an attractive consideration for long-term investors.
When evaluating a company's potential to generate long-term value, one of the most important factors to consider is its ability to consistently achieve high returns on capital employed (ROCE). This key metric shows how effectively a company is utilizing its assets to generate profits, offering a glimpse into its potential as a compounding machine for investors.
For Fortescue (ASX:FMG), this potential is already being realized. The company's current ROCE stands at an impressive 31%, based on trailing twelve months data through June 2024. This return is more than three times higher than the Metals and Mining industry average, which stands at just 10.0%. With such a strong return on its capital, it’s clear that Fortescue is doing something right when it comes to utilizing its resources to generate significant profit.
To understand how this figure is calculated, the formula for ROCE is quite simple. It compares earnings before interest and tax (EBIT) to the total assets of the business after subtracting its current liabilities. For Fortescue, this translates to US$8.5 billion in EBIT and US$27.3 billion in capital employed (after liabilities), which results in the 31% return.
This level of return has been consistent over the past five years, an encouraging sign for the company’s ability to continue generating substantial profits. Even more notably, Fortescue has seen its capital employed increase by 61% during this period, allowing the company to reinvest its earnings in profitable initiatives that continue to compound its success.
The ability to reinvest capital at such an appealing rate suggests that Fortescue may be on the path to becoming a compounding machine, potentially creating significant long-term value. If the company can maintain its 31% ROCE in the coming years and keep reinvesting its capital wisely, its future looks bright, and long-term growth could be a likely outcome.
Looking at past performance, Fortescue’s track record has already delivered impressive results for shareholders, with a 180% return over the last five years. While past performance is not always indicative of future results, this positive trend cannot be ignored. Fortescue certainly appears to be a company with strong prospects, and it continues to be one that could warrant further attention as its story unfolds.
