Returns On Capital Are Showing Encouraging Signs At Fabrinet (NYSE:FN)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Fabrinet (NYSE:FN) looks quite promising in regards to its trends of return on capital.

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. Analysts use this formula to calculate it for Fabrinet:

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

0.17 = US$261m ÷ (US$2.0b - US$455m) (Based on the trailing twelve months to September 2023).

Thus, Fabrinet has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 12% it's much better.

Check out our latest analysis for Fabrinet

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

So How Is Fabrinet's ROCE Trending?

We like the trends that we're seeing from Fabrinet. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 17%. Basically the business is earning more per dollar of capital invested and in addition to that, 86% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

In Conclusion...

To sum it up, Fabrinet has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 287% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Like most companies, Fabrinet does come with some risks, and we've found 1 warning sign that you should be aware of.

While Fabrinet 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. 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.