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Returns On Capital Signal Tricky Times Ahead For FD Technologies (LON:FDP)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. However, after briefly looking over the numbers, we don't think FD Technologies (LON:FDP) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. To calculate this metric for FD Technologies, this is the formula:

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

0.035 = UK£9.7m ÷ (UK£342m - UK£62m) (Based on the trailing twelve months to August 2021).

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So, FD Technologies has an ROCE of 3.5%. In absolute terms, that's a low return and it also under-performs the Software industry average of 8.3%.

See our latest analysis for FD Technologies

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roce

Above you can see how the current ROCE for FD Technologies compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for FD Technologies.

What Does the ROCE Trend For FD Technologies Tell Us?

On the surface, the trend of ROCE at FD Technologies doesn't inspire confidence. To be more specific, ROCE has fallen from 6.8% over the last five years. However it looks like FD Technologies might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

To conclude, we've found that FD Technologies is reinvesting in the business, but returns have been falling. Since the stock has declined 36% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think FD Technologies has the makings of a multi-bagger.

One more thing, we've spotted 3 warning signs facing FD Technologies that you might find interesting.

While FD Technologies isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.