Is FERRO (WSE:FRO) The Next Multi-Bagger?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in FERRO's (WSE:FRO) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

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 FERRO, this is the formula:

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

0.22 = zł73m ÷ (zł538m - zł205m) (Based on the trailing twelve months to September 2020).

Therefore, FERRO has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Building industry average of 14%.

View our latest analysis for FERRO

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

What Does the ROCE Trend For FERRO Tell Us?

Investors would be pleased with what's happening at FERRO. The data shows that returns on capital have increased substantially over the last five years to 22%. The amount of capital employed has increased too, by 41%. 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.

The Bottom Line On FERRO's ROCE

In summary, it's great to see that FERRO can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 228% 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.

If you'd like to know about the risks facing FERRO, we've discovered 1 warning sign that you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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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