Flowtech Fluidpower (LON:FLO) Will Be Hoping To Turn Its Returns On Capital Around

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Having said that, from a first glance at Flowtech Fluidpower (LON:FLO) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Flowtech Fluidpower:

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

0.033 = UK£3.2m ÷ (UK£135m - UK£36m) (Based on the trailing twelve months to June 2020).

So, Flowtech Fluidpower has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 12%.

Check out our latest analysis for Flowtech Fluidpower

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

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Flowtech Fluidpower doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.3% from 9.0% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Flowtech Fluidpower's current liabilities have increased over the last five years to 27% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 3.3%. 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.

In Conclusion...

In summary, we're somewhat concerned by Flowtech Fluidpower's diminishing returns on increasing amounts of capital. And long term shareholders have watched their investments stay flat over the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Flowtech Fluidpower does have some risks, we noticed 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.

While Flowtech Fluidpower 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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