To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Feintool International Holding (VTX:FTON) and its ROCE trend, we weren't exactly thrilled.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Feintool International Holding is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.046 = CHF30m ÷ (CHF808m - CHF156m) (Based on the trailing twelve months to December 2023).
So, Feintool International Holding has an ROCE of 4.6%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 8.6%.
Check out our latest analysis for Feintool International Holding
Above you can see how the current ROCE for Feintool International Holding compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Feintool International Holding .
So How Is Feintool International Holding's ROCE Trending?
On the surface, the trend of ROCE at Feintool International Holding doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.6% from 9.4% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.
The Bottom Line
Bringing it all together, while we're somewhat encouraged by Feintool International Holding's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 57% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Feintool International Holding has the makings of a multi-bagger.