What Should Investors Know About Future Enterprises Limited’s (NSE:FELDVR) Return On Capital?

The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want a simplistic look at the return on Future Enterprises Limited (NSE:FELDVR) stock.

If you purchase a FELDVR share you are effectively becoming a partner with many other shareholders. As a result, your investment is being put to work to fund operations and if you want to earn an attractive return on your investment, the business needs to be making an adequate amount of money from the funds you provide. This is because the actual cash flow generated by the business dictates the potential for income (dividends) and capital appreciation (price increases), which are the two ways to achieve positive returns when buying a stock. Thus, to understand how your money can grow by investing in Future Enterprises, you need to look at what the company returns to owners for the use of their capital, which can be done in many ways but today we will use return on capital employed (ROCE).

See our latest analysis for Future Enterprises

ROCE: Explanation and Calculation

When you choose to invest in a company, there is an opportunity cost because that money could’ve been invested elsewhere. Therefore all else aside, your investment in a certain company represents a vote of confidence that the money used to buy the stock will grow larger than if invested elsewhere. So the business’ ability to grow the size of your capital is very important and can be assessed by comparing the return on capital you can get on your investment with a hurdle rate that depends on the other return possibilities you can identify. We’ll look at Future Enterprises’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. FELDVR’s ROCE is calculated below:

ROCE Calculation for FELDVR

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = ₹646.30m ÷ (₹114.57b – ₹14.18b) = 0.64%

The calculation above shows that FELDVR’s earnings were 0.64% of capital employed. Comparing this to a healthy 15% benchmark shows Future Enterprises is currently unable to return a satisfactory amount to owners for the use of their capital, which isn’t good for investors who have forgone other potentially solid companies.

NSEI:FELDVR Last Perf August 3rd 18
NSEI:FELDVR Last Perf August 3rd 18

A deeper look

Future Enterprises’s relatively poor ROCE is tied to the movement in two factors that change over time: earnings and capital requirements. At the moment Future Enterprises is in an adverse position, but this can change if these factors improve. So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving. Looking at the past 3 year period shows us that FELDVR boosted investor return on capital employed from 0.46%. Over the same period, EBT went from ₹420.30m to ₹646.30m and capital employed also increased but to a smaller extent, which means the company has been able to improve ROCE by driving up earnings relative to the capital invested in the business.

Next Steps

Despite FELDVR’s current ROCE remains at an unattractive level, the company has triggered an upward trend over the recent past which could signal an opportunity for a solid return on investment in the long term. Before making any decisions, ROCE does not tell the whole picture so you need to pay attention to other fundamentals like future prospects and management ability to determine whether there is potential for return by focusing our attention elsewhere. Future Enterprises’s fundamentals can be explored with the links I’ve provided below if you are interested, otherwise you can start looking at other high-performing stocks.

  1. Future Outlook: What are well-informed industry analysts predicting for FELDVR’s future growth? Take a look at our free research report of analyst consensus for FELDVR’s outlook.
  2. Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for Future Enterprises’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.