In This Article:
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Frencken Group (SGX:E28) and its ROCE trend, we weren't exactly thrilled.
What Is 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. 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)
0.094 = S$45m ÷ (S$735m - S$251m) (Based on the trailing twelve months to December 2024).
Therefore, Frencken Group has an ROCE of 9.4%. On its own that's a low return, but compared to the average of 4.4% generated by the Machinery industry, it's much better.
View 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 Can We Tell From Frencken Group's ROCE Trend?
In terms of Frencken Group's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 9.4% from 17% five years ago. 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
Bringing it all together, while we're somewhat encouraged by Frencken Group's reinvestment in its own business, we're aware that returns are shrinking. Yet to long term shareholders the stock has gifted them an incredible 119% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
If you're still interested in Frencken Group it's worth checking out our FREE intrinsic value approximation for E28 to see if it's trading at an attractive price in other respects.