Yahoo Finance Some Investors May Be Worried About Flowtech Fluidpower's (LON:FLO) Returns On Capital
Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Flowtech Fluidpower (LON:FLO) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What is it?
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. To calculate this metric for Flowtech Fluidpower, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.02 = UK£2.3m ÷ (UK£138m - UK£23m) (Based on the trailing twelve months to June 2021).
Thus, Flowtech Fluidpower has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 14%.
Check out our latest analysis for Flowtech Fluidpower
In the above chart we have measured Flowtech Fluidpower's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Does the ROCE Trend For Flowtech Fluidpower Tell Us?
In terms of Flowtech Fluidpower's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 9.8%, but since then they've fallen to 2.0%. 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 may take some time before the company starts to see any change in earnings from these investments.
In Conclusion...
To conclude, we've found that Flowtech Fluidpower is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 18% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
Like most companies, Flowtech Fluidpower does come with some risks, and we've found 1 warning sign that you should be aware of.
While Flowtech Fluidpower isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
