Here's What Ferronordic's (STO:FNM) Strong Returns On Capital Mean

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Ergo, when we looked at the ROCE trends at Ferronordic (STO:FNM), we liked what we saw.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Ferronordic is:

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

0.33 = kr536m ÷ (kr3.4b - kr1.8b) (Based on the trailing twelve months to March 2022).

Therefore, Ferronordic has an ROCE of 33%. In absolute terms that's a great return and it's even better than the Trade Distributors industry average of 16%.

See our latest analysis for Ferronordic

Above you can see how the current ROCE for Ferronordic compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Ferronordic here for free.

What Can We Tell From Ferronordic's ROCE Trend?

It's hard not to be impressed by Ferronordic's returns on capital. The company has consistently earned 33% for the last five years, and the capital employed within the business has risen 234% in that time. Now considering ROCE is an attractive 33%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

Another thing to note, Ferronordic has a high ratio of current liabilities to total assets of 52%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

In short, we'd argue Ferronordic has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. What's surprising though is that the stock has collapsed 72% over the last three years, so there might be other areas of the business hurting its prospects. So in light of that'd we think it's worthwhile looking further into this stock to see if there's any areas for concern.

One final note, you should learn about the 3 warning signs we've spotted with Ferronordic (including 2 which are potentially serious) .

Ferronordic is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.