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. 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 looked at the ROCE trend of Comfort Systems USA (NYSE:FIX) we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Comfort Systems USA:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.35 = US$746m ÷ (US$4.7b - US$2.6b) (Based on the trailing twelve months to December 2024).
So, Comfort Systems USA has an ROCE of 35%. In absolute terms that's a great return and it's even better than the Construction industry average of 10%.
Check out 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 analyst report for Comfort Systems USA .
So How Is Comfort Systems USA's ROCE Trending?
Investors would be pleased with what's happening at Comfort Systems USA. Over the last five years, returns on capital employed have risen substantially to 35%. Basically the business is earning more per dollar of capital invested and in addition to that, 137% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 55% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.
What We Can Learn From Comfort Systems USA's ROCE
All in all, it's terrific to see that Comfort Systems USA is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Comfort Systems USA can keep these trends up, it could have a bright future ahead.
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.
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.