If you are looking for a multi-bagger, there are a few things to look out for. A common approach is to try to find a business with Return on capital employed (ROCE) which increases, in connection with growth amount capital employed. Ultimately, this demonstrates that this is a company that is reinvesting its profits at increasing rates of return. With that in mind, we’ve noticed some promising trends at Fervid (BIT: FVI) So let’s look a little deeper.
What is Return on Employee Capital (ROCE)?
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. Analysts use this formula to calculate it for Fervi:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.087 = 3.0 M € ÷ (41 M € – 7.2 M €) (Based on the last twelve months up to December 2020).
So, Fervi has a ROCE of 8.7%. On its own, that’s a low return, but compared to the 7.0% average generated by the machinery industry, it’s much better.
See our latest review for Fervi
In the graph above, we’ve measured Fervi’s past ROCE against its past performance, but the future is arguably more important. If you are interested, you can view analyst forecasts in our free analyst forecast report for the company.
The ROCE trend
Even though the ROCE is still low in absolute terms, it is good to see that it is moving in the right direction. Data shows that returns on capital have increased dramatically over the past five years to reach 8.7%. The company actually makes more money per dollar of capital employed, and it should be noted that the amount of capital has also increased, by 79%. We are therefore very inspired by what we see at Fervi thanks to its ability to reinvest capital profitably.
One more thing to note, Fervi reduced current liabilities to 17% of total assets over this period, effectively reducing the amount of financing from suppliers or short-term creditors. Shareholders would therefore be delighted if the growth in returns was primarily driven by underlying business performance.
The bottom line
Overall, it’s great to see that Fervi is reaping the rewards of past investments and growing its capital base. Savvy investors may have an opportunity here because the stock has fallen 19% in the past three years. However, research into current valuation metrics and the company’s future prospects seems appropriate.
Fervi does carry some risks though, we have found 3 warning signs in our investment analysis, and 1 of them is not going too well with us …
While Fervi is not currently achieving the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. Check it out free list here.
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