FRoSTA (FRA:NLM) Has More To Do To Multiply In Value Going Forward

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So, when we ran our eye over FRoSTA's (FRA:NLM) trend of ROCE, we liked what we saw.

Understanding 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. To calculate this metric for FRoSTA, this is the formula:

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

0.17 = €36m ÷ (€308m - €93m) (Based on the trailing twelve months to December 2020).

So, FRoSTA has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 8.2% it's much better.

Check out our latest analysis for FRoSTA

Historical performance is a great place to start when researching a stock so above you can see the gauge for FRoSTA's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of FRoSTA, check out these free graphs here.

How Are Returns Trending?

While the current returns on capital are decent, they haven't changed much. The company has consistently earned 17% for the last five years, and the capital employed within the business has risen 40% in that time. Since 17% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

What We Can Learn From FRoSTA's ROCE

To sum it up, FRoSTA has simply been reinvesting capital steadily, at those decent rates of return. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

If you want to continue researching FRoSTA, you might be interested to know about the 1 warning sign that our analysis has discovered.

While FRoSTA 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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