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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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Frequentis (ETR:FQT) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Frequentis:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.099 = €22m ÷ (€385m - €158m) (Based on the trailing twelve months to June 2024).
So, Frequentis has an ROCE of 9.9%. In absolute terms, that's a low return and it also under-performs the Aerospace & Defense industry average of 14%.
See our latest analysis for Frequentis
In the above chart we have measured Frequentis' 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 Frequentis .
So How Is Frequentis' ROCE Trending?
There are better returns on capital out there than what we're seeing at Frequentis. Over the past five years, ROCE has remained relatively flat at around 9.9% and the business has deployed 45% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
Another thing to note, Frequentis has a high ratio of current liabilities to total assets of 41%. 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.
Our Take On Frequentis' ROCE
As we've seen above, Frequentis' returns on capital haven't increased but it is reinvesting in the business. And investors may be recognizing these trends since the stock has only returned a total of 37% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.