Investors Will Want Fridenson Logistic Services' (TLV:FRDN) 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? 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. Speaking of which, we noticed some great changes in Fridenson Logistic Services' (TLV:FRDN) returns on capital, so let's have a 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. To calculate this metric for Fridenson Logistic Services, this is the formula:

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

0.14 = ₪26m ÷ (₪336m - ₪146m) (Based on the trailing twelve months to September 2021).

Thus, Fridenson Logistic Services has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Logistics industry average of 11% it's much better.

View our latest analysis for Fridenson Logistic Services

Historical performance is a great place to start when researching a stock so above you can see the gauge for Fridenson Logistic Services' ROCE against it's prior returns. If you're interested in investigating Fridenson Logistic Services' past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

Fridenson Logistic Services is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 53% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 43% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

Our Take On Fridenson Logistic Services' ROCE

To bring it all together, Fridenson Logistic Services has done well to increase the returns it's generating from its capital employed. Since the stock has only returned 14% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

If you want to know some of the risks facing Fridenson Logistic Services we've found 6 warning signs (2 are concerning!) that you should be aware of before investing here.

While Fridenson Logistic Services 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.