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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Formosa Prosonic Industries Berhad's (KLSE:FPI) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
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 Formosa Prosonic Industries Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = RM92m ÷ (RM720m - RM201m) (Based on the trailing twelve months to September 2023).
Therefore, Formosa Prosonic Industries Berhad has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 10% generated by the Consumer Durables industry.
View our latest analysis for Formosa Prosonic Industries Berhad
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Formosa Prosonic Industries Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
Formosa Prosonic Industries Berhad is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 18%. Basically the business is earning more per dollar of capital invested and in addition to that, 72% more capital is being employed now too. So we're very much inspired by what we're seeing at Formosa Prosonic Industries Berhad thanks to its ability to profitably reinvest capital.
Our Take On Formosa Prosonic Industries Berhad's ROCE
All in all, it's terrific to see that Formosa Prosonic Industries Berhad is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Formosa Prosonic Industries Berhad can keep these trends up, it could have a bright future ahead.