What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Speaking of which, we noticed some great changes in Froch Enterprise’s (TPE:2030) returns on capital, so let’s have a look.
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. The formula for this calculation on Froch Enterprise is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.033 = NT$208m ÷ (NT$11b – NT$4.9b) (Based on the trailing twelve months to September 2020).
Thus, Froch Enterprise has an ROCE of 3.3%. In absolute terms, that’s a low return but it’s around the Metals and Mining industry average of 3.6%.
Above you can see how the current ROCE for Froch Enterprise compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like, you can check out the forecasts from the analysts covering Froch Enterprise here for free.
So How Is Froch Enterprise’s ROCE Trending?
While the ROCE isn’t as high as some other companies out there, it’s great to see it’s on the up. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 122% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company’s efficiencies. On that front, things are looking good so it’s worth exploring what management has said about growth plans going forward.
On a separate but related note, it’s important to know that Froch Enterprise has a current liabilities to total assets ratio of 44%, which we’d consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we’d like to see this reduce as that would mean fewer obligations bearing risks.
To sum it up, Froch Enterprise is collecting higher returns from the same amount of capital, and that’s impressive. And with a respectable 80% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.
One final note, you should learn about the 3 warning signs we’ve spotted with Froch Enterprise (including 1 which is a bit unpleasant) .
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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