Fraport (ETR:FRA) Might Be Having Difficulty Using Its Capital Effectively

By
Simply Wall St
Published
May 13, 2022
XTRA:FRA
Source: Shutterstock

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Fraport (ETR:FRA) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for Fraport:

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

0.00074 = €11m ÷ (€17b - €1.5b) (Based on the trailing twelve months to March 2022).

Therefore, Fraport has an ROCE of 0.07%. Ultimately, that's a low return and it under-performs the Infrastructure industry average of 7.6%.

View our latest analysis for Fraport

roce
XTRA:FRA Return on Capital Employed May 13th 2022

Above you can see how the current ROCE for Fraport compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Fraport.

What Does the ROCE Trend For Fraport Tell Us?

When we looked at the ROCE trend at Fraport, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 0.07% from 5.2% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line

While returns have fallen for Fraport in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 28% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Fraport does have some risks, we noticed 3 warning signs (and 1 which is significant) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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