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What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Frencken Group (SGX:E28), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
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. To calculate this metric for Frencken Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.095 = S$44m ÷ (S$701m - S$241m) (Based on the trailing twelve months to June 2024).
Thus, Frencken Group has an ROCE of 9.5%. On its own that's a low return, but compared to the average of 7.0% generated by the Machinery industry, it's much better.
Check out our latest analysis for Frencken Group
Above you can see how the current ROCE for Frencken Group 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 Frencken Group for free.
What Does the ROCE Trend For Frencken Group Tell Us?
On the surface, the trend of ROCE at Frencken Group doesn't inspire confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 9.5%. However it looks like Frencken Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
Our Take On Frencken Group's ROCE
To conclude, we've found that Frencken Group is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 111% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
Frencken Group could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for E28 on our platform quite valuable.