Yahoo Finance FW Thorpe (LON:TFW) May Have Issues Allocating Its Capital
What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating FW Thorpe (LON:TFW), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for FW Thorpe, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = UK£16m ÷ (UK£167m - UK£34m) (Based on the trailing twelve months to December 2020).
Therefore, FW Thorpe has an ROCE of 12%. That's a pretty standard return and it's in line with the industry average of 12%.
See our latest analysis for FW Thorpe
Historical performance is a great place to start when researching a stock so above you can see the gauge for FW Thorpe's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of FW Thorpe, check out these free graphs here.
How Are Returns Trending?
In terms of FW Thorpe's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 12% from 16% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
In Conclusion...
In summary, FW Thorpe is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 72% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
FW Thorpe does have some risks though, and we've spotted 1 warning sign for FW Thorpe that you might be interested in.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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