Returns At Frequency Electronics (NASDAQ:FEIM) Are On The Way Up

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 looked at Frequency Electronics (NASDAQ:FEIM) and its trend of ROCE, we really liked what we saw.

Understanding 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 Frequency Electronics is:

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

0.15 = US$7.0m ÷ (US$78m - US$30m) (Based on the trailing twelve months to October 2024).

So, Frequency Electronics has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 10% generated by the Electronic industry.

See our latest analysis for Frequency Electronics

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Frequency Electronics has performed in the past in other metrics, you can view this free graph of Frequency Electronics' past earnings, revenue and cash flow.

The Trend Of ROCE

It's great to see that Frequency Electronics has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 15% which is no doubt a relief for some early shareholders. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 42%. Frequency Electronics could be selling under-performing assets since the ROCE is improving.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 38% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

What We Can Learn From Frequency Electronics' ROCE

In summary, it's great to see that Frequency Electronics has been able to turn things around and earn higher returns on lower amounts of capital. And a remarkable 156% 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.

While Frequency Electronics looks impressive, no company is worth an infinite price. The intrinsic value infographic for FEIM helps visualize whether it is currently trading for a fair price.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.