Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in FFI Holdings' (ASX:FFI) returns on capital, so let's have a look.
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. The formula for this calculation on FFI Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = AU$4.8m ÷ (AU$49m - AU$5.7m) (Based on the trailing twelve months to December 2020).
Therefore, FFI Holdings has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 5.8% it's much better.
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're interested in investigating FFI Holdings' past further, check out this free graph of past earnings, revenue and cash flow.
So How Is FFI Holdings' ROCE Trending?
FFI Holdings has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 46% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
The Bottom Line On FFI Holdings' ROCE
To bring it all together, FFI Holdings has done well to increase the returns it's generating from its capital employed. And a remarkable 151% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.
FFI Holdings does have some risks though, and we've spotted 2 warning signs for FFI Holdings that you might be interested in.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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