Investors Will Want Froch Enterprise's (TPE:2030) Growth In ROCE To Persist

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Speaking of which, we noticed some great changes in Froch Enterprise's (TPE:2030) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Froch Enterprise:

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

0.033 = NT$235m ÷ (NT$12b - NT$4.6b) (Based on the trailing twelve months to December 2020).

Thus, Froch Enterprise has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 4.3%.

Check out our latest analysis for Froch Enterprise

In the above chart we have measured Froch Enterprise'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 Froch Enterprise here for free.

What Can We Tell From Froch Enterprise's ROCE Trend?

We're delighted to see that Froch Enterprise is reaping rewards from its investments and has now broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 3.3% on its capital. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

What We Can Learn From Froch Enterprise's ROCE

In summary, we're delighted to see that Froch Enterprise has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a staggering 124% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Froch Enterprise can keep these trends up, it could have a bright future ahead.

On a final note, we found 4 warning signs for Froch Enterprise (1 is a bit unpleasant) you should be aware of.

While Froch Enterprise 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.

If you’re looking to trade Froch Enterprise, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.