If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. So, when we ran our eye over Comfort Systems USA’s (NYSE:FIX) trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
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 Comfort Systems USA, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.24 = US$369m ÷ (US$3.1b – US$1.6b) (Based on the trailing twelve months to September 2023).
Thus, Comfort Systems USA has an ROCE of 24%. That’s a fantastic return and not only that, it outpaces the average of 9.8% earned by companies in a similar industry.
See our latest analysis for Comfort Systems USA
Above you can see how the current ROCE for Comfort Systems USA compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like to see what analysts are forecasting going forward, you should check out our free report for Comfort Systems USA.
So How Is Comfort Systems USA’s ROCE Trending?
It’s hard not to be impressed by Comfort Systems USA’s returns on capital. Over the past five years, ROCE has remained relatively flat at around 24% and the business has deployed 146% more capital into its operations. Now considering ROCE is an attractive 24%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If these trends can continue, it wouldn’t surprise us if the company became a multi-bagger.
On a side note, Comfort Systems USA’s current liabilities are still rather high at 52% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we’d like to see this reduce as that would mean fewer obligations bearing risks.
The Bottom Line
In short, we’d argue Comfort Systems USA has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. On top of that, the stock has rewarded shareholders with a remarkable 393% return to those who’ve held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
One more thing to note, we’ve identified 1 warning sign with Comfort Systems USA and understanding this should be part of your investment process.
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.
