The Returns On Capital At FTGroup (TYO:2763) Don't Inspire Confidence

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at FTGroup (TYO:2763), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

What is 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 FTGroup, this is the formula:

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

0.24 = JP¥5.5b ÷ (JP¥33b - JP¥10b) (Based on the trailing twelve months to December 2020).

Therefore, FTGroup has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Electronic industry average of 7.3%.

Check out our latest analysis for FTGroup

Historical performance is a great place to start when researching a stock so above you can see the gauge for FTGroup's ROCE against it's prior returns. If you'd like to look at how FTGroup 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 FTGroup's ROCE Trend?

On the surface, the trend of ROCE at FTGroup doesn't inspire confidence. To be more specific, while the ROCE is still high, it's fallen from 38% where it was five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

In summary, FTGroup is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 148% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a final note, we've found 1 warning sign for FTGroup that we think you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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