Returns On Capital At Fernheizwerk Neukölln (FRA:FHW) Paint A Concerning Picture

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Fernheizwerk Neukölln (FRA:FHW) and its ROCE trend, we weren't exactly thrilled.

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 Fernheizwerk Neukölln is:

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

0.087 = €8.3m ÷ (€122m - €26m) (Based on the trailing twelve months to December 2023).

Therefore, Fernheizwerk Neukölln has an ROCE of 8.7%. In absolute terms, that's a low return, but it's much better than the Water Utilities industry average of 3.3%.

Check out our latest analysis for Fernheizwerk Neukölln

Historical performance is a great place to start when researching a stock so above you can see the gauge for Fernheizwerk Neukölln's ROCE against it's prior returns. If you'd like to look at how Fernheizwerk Neukölln has performed in the past in other metrics, you can view this free graph of Fernheizwerk Neukölln's past earnings, revenue and cash flow.

What Does the ROCE Trend For Fernheizwerk Neukölln Tell Us?

In terms of Fernheizwerk Neukölln's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 14% over the last five years. 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.

On a side note, Fernheizwerk Neukölln's current liabilities have increased over the last five years to 22% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 8.7%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

Our Take On Fernheizwerk Neukölln's ROCE

While returns have fallen for Fernheizwerk Neukölln in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 26% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Fernheizwerk Neukölln (of which 1 is concerning!) that you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.