Returns On Capital At FP (TSE:7947) Have Stalled

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at FP (TSE:7947) and its ROCE trend, we weren't exactly thrilled.

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Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for FP:

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

0.085 = JP¥18b ÷ (JP¥303b - JP¥93b) (Based on the trailing twelve months to December 2024).

Thus, FP has an ROCE of 8.5%. In absolute terms, that's a low return, but it's much better than the Packaging industry average of 5.6%.

View our latest analysis for FP

Above you can see how the current ROCE for FP compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for FP .

What Does the ROCE Trend For FP Tell Us?

The returns on capital haven't changed much for FP in recent years. The company has consistently earned 8.5% for the last five years, and the capital employed within the business has risen 28% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Our Take On FP's ROCE

Long story short, while FP has been reinvesting its capital, the returns that it's generating haven't increased. And in the last five years, the stock has given away 23% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you want to continue researching FP, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.