Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. With that in mind, the ROCE of Ferguson Enterprises (NYSE:FERG) looks great, so lets see what the trend can tell us.

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. The formula for this calculation on Ferguson Enterprises is:

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

0.23 = US$2.6b ÷ (US$17b - US$5.2b) (Based on the trailing twelve months to July 2024).

Thus, Ferguson Enterprises has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 12% earned by companies in a similar industry.

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 free analyst report for Ferguson Enterprises .

What Does the ROCE Trend For Ferguson Enterprises Tell Us?

Investors would be pleased with what's happening at Ferguson Enterprises. Over the last five years, returns on capital employed have risen substantially to 23%. The amount of capital employed has increased too, by 58%. So we're very much inspired by what we're seeing at Ferguson Enterprises thanks to its ability to profitably reinvest capital.

In Conclusion...

All in all, it's terrific to see that Ferguson Enterprises is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 156% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Ferguson Enterprises can keep these trends up, it could have a bright future ahead.

If you want to continue researching Ferguson Enterprises, you might be interested to know about the 3 warning signs that our analysis has discovered.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.