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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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Frequency Electronics (NASDAQ:FEIM) and its trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Frequency Electronics, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = US$11m ÷ (US$86m - US$23m) (Based on the trailing twelve months to January 2025).
Therefore, Frequency Electronics has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 10% it's much better.
See our latest analysis for Frequency Electronics
Historical performance is a great place to start when researching a stock so above you can see the gauge for Frequency Electronics' ROCE against it's prior returns. If you'd like to look at how Frequency Electronics has performed in the past in other metrics, you can view this free graph of Frequency Electronics' past earnings, revenue and cash flow .
How Are Returns Trending?
Like most people, we're pleased that Frequency Electronics is now generating some pretax earnings. While the business is profitable now, it used to be incurring losses on invested capital five years ago. In regards to capital employed, Frequency Electronics is using 23% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 26% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.