The Returns At Fagron (EBR:FAGR) Aren't Growing

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. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Fagron (EBR:FAGR), it didn't seem to tick all of these boxes.

What is 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. The formula for this calculation on Fagron is:

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

0.16 = €89m ÷ (€753m - €200m) (Based on the trailing twelve months to December 2020).

Therefore, Fagron has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 8.4% generated by the Healthcare industry.

See our latest analysis for Fagron

In the above chart we have measured Fagron's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Fagron.

So How Is Fagron's ROCE Trending?

Over the past four years, Fagron's ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Fagron doesn't end up being a multi-bagger in a few years time.

On a side note, Fagron has done well to reduce current liabilities to 27% of total assets over the last four years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

What We Can Learn From Fagron's ROCE

In a nutshell, Fagron has been trudging along with the same returns from the same amount of capital over the last four years. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 217% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a final note, we've found 1 warning sign for Fagron that we think you should be aware of.

While Fagron may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

When trading Fagron or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.