Investors Will Want freenet's (ETR:FNTN) Growth In ROCE To Persist

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at freenet (ETR:FNTN) so let's look a bit deeper.

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 freenet is:

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

0.15 = €351m ÷ (€3.3b - €932m) (Based on the trailing twelve months to September 2024).

So, freenet has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 8.7% generated by the Wireless Telecom industry.

See our latest analysis for freenet

In the above chart we have measured freenet's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering freenet for free.

So How Is freenet's ROCE Trending?

freenet has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 110%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 37% less than it was five years ago, which can be indicative of a business that's improving its efficiency. freenet may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

The Key Takeaway

From what we've seen above, freenet has managed to increase it's returns on capital all the while reducing it's capital base. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 84% return over the last five years. In light of that, we think it's worth looking further into this stock because if freenet can keep these trends up, it could have a bright future ahead.

One more thing, we've spotted 1 warning sign facing freenet that you might find interesting.

While freenet 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.