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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Francotyp-Postalia Holding (ETR:FPH) looks quite promising in regards to its trends of return on capital.
What Is 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. Analysts use this formula to calculate it for Francotyp-Postalia Holding:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.092 = €6.9m ÷ (€185m - €111m) (Based on the trailing twelve months to June 2023).
Therefore, Francotyp-Postalia Holding has an ROCE of 9.2%. On its own, that's a low figure but it's around the 7.7% average generated by the Commercial Services industry.
Above you can see how the current ROCE for Francotyp-Postalia Holding compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is Francotyp-Postalia Holding's ROCE Trending?
We're pretty happy with how the ROCE has been trending at Francotyp-Postalia Holding. The figures show that over the last five years, returns on capital have grown by 31%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Francotyp-Postalia Holding appears to been achieving more with less, since the business is using 23% less capital to run its operation. Francotyp-Postalia Holding may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 60% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.
The Key Takeaway
From what we've seen above, Francotyp-Postalia Holding has managed to increase it's returns on capital all the while reducing it's capital base. Given the stock has declined 24% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
Francotyp-Postalia Holding does have some risks though, and we've spotted 2 warning signs for Francotyp-Postalia Holding that you might be interested in.
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.