Here's What To Make Of Frauenthal Holding's (VIE:FKA) Returns On Capital

February 03, 2021
  •  Updated
October 05, 2022
WBAG:FKA
Source: Shutterstock

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at Frauenthal Holding (VIE:FKA) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper 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. To calculate this metric for Frauenthal Holding, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.05 = €12m ÷ (€433m - €196m) (Based on the trailing twelve months to June 2020).

So, Frauenthal Holding has an ROCE of 5.0%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 11%.

Check out our latest analysis for Frauenthal Holding

roce
WBAG:FKA Return on Capital Employed February 4th 2021

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 Frauenthal Holding has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Frauenthal Holding's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 8.1% over the last five years. However it looks like Frauenthal Holding 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.

On a related note, Frauenthal Holding has decreased its current liabilities to 45% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 45% is still pretty high, so those risks are still somewhat prevalent.

The Bottom Line On Frauenthal Holding's ROCE

To conclude, we've found that Frauenthal Holding is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 72% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing: We've identified 4 warning signs with Frauenthal Holding (at least 1 which is significant) , and understanding these would certainly be useful.

While Frauenthal Holding isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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