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Flowtech Fluidpower (LON:FLO) Might Be Having Difficulty Using Its Capital Effectively

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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. 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 Flowtech Fluidpower (LON:FLO) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.039 = UK£4.5m ÷ (UK£139m - UK£23m) (Based on the trailing twelve months to December 2021).

Therefore, Flowtech Fluidpower has an ROCE of 3.9%. 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

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roce

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'd like, you can check out the forecasts from the analysts covering Flowtech Fluidpower here for free.

How Are Returns Trending?

When we looked at the ROCE trend at Flowtech Fluidpower, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.9% from 9.8% five years ago. 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. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

While returns have fallen for Flowtech Fluidpower in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you'd like to know about the risks facing Flowtech Fluidpower, we've discovered 1 warning sign that you should be aware of.

While Flowtech Fluidpower 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.

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.