These Trends Paint A Bright Future For F&F (KRX:007700)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in F&F's (KRX:007700) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

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 F&F, this is the formula:

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

0.22 = ₩121b ÷ (₩697b - ₩154b) (Based on the trailing twelve months to September 2020).

So, F&F has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Luxury industry average of 7.7%.

Check out our latest analysis for F&F

Above you can see how the current ROCE for F&F compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for F&F.

What The Trend Of ROCE Can Tell Us

We like the trends that we're seeing from F&F. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 22%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 140%. So we're very much inspired by what we're seeing at F&F thanks to its ability to profitably reinvest capital.

On a related note, the company's ratio of current liabilities to total assets has decreased to 22%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that F&F has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From F&F's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what F&F has. And a remarkable 863% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Like most companies, F&F does come with some risks, and we've found 1 warning sign that 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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