Here's What's Concerning About FW Thorpe's (LON:TFW) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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 investigating FW Thorpe (LON:TFW), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for FW Thorpe, this is the formula:

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

0.12 = UK£16m ÷ (UK£167m - UK£34m) (Based on the trailing twelve months to December 2020).

Therefore, FW Thorpe has an ROCE of 12%. That's a pretty standard return and it's in line with the industry average of 12%.

View our latest analysis for FW Thorpe

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

What Can We Tell From FW Thorpe's ROCE Trend?

On the surface, the trend of ROCE at FW Thorpe doesn't inspire confidence. Over the last five years, returns on capital have decreased to 12% from 16% five years ago. However it looks like FW Thorpe might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On FW Thorpe's ROCE

Bringing it all together, while we're somewhat encouraged by FW Thorpe's reinvestment in its own business, we're aware that returns are shrinking. Yet to long term shareholders the stock has gifted them an incredible 127% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you're still interested in FW Thorpe it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

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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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.
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