Returns At Formosa Prosonic Industries Berhad (KLSE:FPI) Are On The Way Up

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. So when we looked at Formosa Prosonic Industries Berhad (KLSE:FPI) and its trend of ROCE, we really liked what we saw.

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. To calculate this metric for Formosa Prosonic Industries Berhad, this is the formula:

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

0.20 = RM70m ÷ (RM591m - RM241m) (Based on the trailing twelve months to December 2020).

Therefore, Formosa Prosonic Industries Berhad has an ROCE of 20%. In absolute terms, that's a satisfactory return, but compared to the Consumer Durables industry average of 9.9% it's much better.

View our latest analysis for Formosa Prosonic Industries Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Formosa Prosonic Industries Berhad's ROCE against it's prior returns. If you're interested in investigating Formosa Prosonic Industries Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Formosa Prosonic Industries Berhad Tell Us?

Investors would be pleased with what's happening at Formosa Prosonic Industries Berhad. Over the last five years, returns on capital employed have risen substantially to 20%. Basically the business is earning more per dollar of capital invested and in addition to that, 22% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 41% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

The Bottom Line On Formosa Prosonic Industries Berhad's ROCE

All in all, it's terrific to see that Formosa Prosonic Industries Berhad is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 343% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you want to continue researching Formosa Prosonic Industries Berhad, you might be interested to know about the 2 warning signs 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. 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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