Has FRoSTA (FRA:NLM) Got What It Takes To Become A Multi-Bagger?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. With that in mind, the ROCE of FRoSTA (FRA:NLM) looks decent, right now, so lets see what the trend of returns can tell us.

What is 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 FRoSTA is:

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

0.13 = €27m ÷ (€328m - €125m) (Based on the trailing twelve months to June 2020).

Therefore, FRoSTA has an ROCE of 13%. 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're interested in investigating FRoSTA's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From FRoSTA's ROCE Trend?

While the current returns on capital are decent, they haven't changed much. The company has employed 39% more capital in the last five years, and the returns on that capital have remained stable at 13%. 13% is a pretty standard return, and it provides some comfort knowing that FRoSTA has consistently earned this amount. 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.

The Bottom Line

The main thing to remember is that FRoSTA has proven its ability to continually reinvest at respectable rates of return. And the stock has followed suit returning a meaningful 98% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

On a final note, we found 2 warning signs for FRoSTA (1 makes us a bit uncomfortable) you should be aware of.

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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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.
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