Returns At FW Thorpe (LON:TFW) Appear To Be Weighed Down
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So, when we ran our eye over FW Thorpe's (LON:TFW) trend of ROCE, we liked what we saw.
Return On Capital Employed (ROCE): What Is It?
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)
0.15 = UK£25m ÷ (UK£207m - UK£37m) (Based on the trailing twelve months to June 2022).
So, FW Thorpe has an ROCE of 15%. That's a relatively normal return on capital, and it's around the 13% generated by the Electrical industry.
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're interested in investigating FW Thorpe's past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 55% more capital in the last five years, and the returns on that capital have remained stable at 15%. 15% is a pretty standard return, and it provides some comfort knowing that FW Thorpe has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
Our Take On FW Thorpe's ROCE
The main thing to remember is that FW Thorpe has proven its ability to continually reinvest at respectable rates of return. However, over the last five years, the stock has only delivered a 17% return to shareholders who held over that period. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.
On a final note, we've found 1 warning sign for FW Thorpe that we think you should be aware of.
While FW Thorpe 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.
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