We Like These Underlying Trends At Corporativo Fragua. de (BMV:FRAGUAB)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. So on that note, Corporativo Fragua. de (BMV:FRAGUAB) looks quite promising in regards to its trends of return on capital.

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 Corporativo Fragua. de, this is the formula:

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

0.085 = Mex$1.4b ÷ (Mex$30b - Mex$13b) (Based on the trailing twelve months to September 2020).

So, Corporativo Fragua. de has an ROCE of 8.5%. On its own, that's a low figure but it's around the 9.4% average generated by the Consumer Retailing industry.

Check out our latest analysis for Corporativo Fragua. de

In the above chart we have measured Corporativo Fragua. de's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Corporativo Fragua. de here for free.

What Can We Tell From Corporativo Fragua. de's ROCE Trend?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 8.5%. 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 91%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Another thing to note, Corporativo Fragua. de has a high ratio of current liabilities to total assets of 44%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Corporativo Fragua. de's ROCE

To sum it up, Corporativo Fragua. de has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Considering the stock has delivered 16% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

While Corporativo Fragua. de looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether FRAGUA B is currently trading for a fair price.

While Corporativo Fragua. de may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. 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.
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