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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Flint's (TSE:FLNT) returns on capital, so let's have a look.
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 Flint is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = CA$16m ÷ (CA$225m - CA$66m) (Based on the trailing twelve months to June 2024).
So, Flint has an ROCE of 10%. In absolute terms, that's a pretty standard return but compared to the Energy Services industry average it falls behind.
See our latest analysis for Flint
Historical performance is a great place to start when researching a stock so above you can see the gauge for Flint's ROCE against it's prior returns. If you'd like to look at how Flint has performed in the past in other metrics, you can view this free graph of Flint's past earnings, revenue and cash flow.
So How Is Flint's ROCE Trending?
Flint's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 475% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
On a related note, the company's ratio of current liabilities to total assets has decreased to 29%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.
Our Take On Flint's ROCE
In summary, we're delighted to see that Flint has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And since the stock has fallen 62% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.