Yahoo Finance The Returns On Capital At Fraport (ETR:FRA) Don't Inspire Confidence
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. In light of that, when we looked at Fraport (ETR:FRA) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Fraport is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.039 = €613m ÷ (€19b - €2.8b) (Based on the trailing twelve months to September 2023).
Thus, Fraport has an ROCE of 3.9%. In absolute terms, that's a low return and it also under-performs the Infrastructure industry average of 9.9%.
See our latest analysis for Fraport
In the above chart we have measured Fraport'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 Fraport for free.
What Can We Tell From Fraport's ROCE Trend?
In terms of Fraport's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 7.2% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
What We Can Learn From Fraport's ROCE
While returns have fallen for Fraport in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 25% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
Fraport does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored...
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.
