Should We Be Excited About The Trends Of Returns At Flexible Solutions International (NYSEMKT:FSI)?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So, when we ran our eye over Flexible Solutions International's (NYSEMKT:FSI) trend of ROCE, we liked what we saw.

What is 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. To calculate this metric for Flexible Solutions International, this is the formula:

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

0.14 = US$4.0m ÷ (US$34m - US$6.7m) (Based on the trailing twelve months to September 2020).

Thus, Flexible Solutions International has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 8.3% generated by the Chemicals industry.

See our latest analysis for Flexible Solutions International

In the above chart we have measured Flexible Solutions International's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Flexible Solutions International.

So How Is Flexible Solutions International's ROCE Trending?

While the current returns on capital are decent, they haven't changed much. The company has employed 125% more capital in the last five years, and the returns on that capital have remained stable at 14%. 14% is a pretty standard return, and it provides some comfort knowing that Flexible Solutions International has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 19% of total assets, this reported ROCE would probably be less than14% because total capital employed would be higher.The 14% ROCE could be even lower if current liabilities weren't 19% of total assets, because the the formula would show a larger base of total capital employed. So while current liabilities isn't high right now, keep an eye out in case it increases further, because this can introduce some elements of risk.

The Bottom Line

In the end, Flexible Solutions International has proven its ability to adequately reinvest capital at good rates of return. And the stock has done incredibly well with a 211% return over the last five years, so long term investors are no doubt ecstatic with that result. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

If you want to know some of the risks facing Flexible Solutions International we've found 3 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

While Flexible Solutions International 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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