Franklin Electric (NASDAQ: FELE) has seen no lack of growth recently for its return on investment
If we want to find a stock that could multiply over the long term, what underlying trends should we be looking for? A common approach is to find a company that returns on capital employed (ROCE), which is combined with a growing be of the capital employed. Ultimately, this shows that it is a company that is reinvesting profits with increasing returns. Speaking of which, we’ve made some great changes in Franklin Electrics (NASDAQ: FELE) ROI, so let’s take a look.
What is return on investment (ROCE)?
For those unsure of what ROCE is, it measures the amount of pre-tax profit a company can make from the capital invested in its business. To calculate this metric for Franklin Electric, this is the formula:
Return on capital employed = earnings before interest and taxes (EBIT) ÷ (total assets – current liabilities)
0.15 = $ 175 million ÷ ($ 1.5 billion – $ 401 million) (Based on the last twelve months through September 2021).
Therefore, Franklin Electric has a ROCE of 15%. This is a satisfactory return in absolute terms, but it is much better compared to the industry average of 10%.
Check out our latest analysis for Franklin Electric
In the graph above, we measured Franklin Electric’s past ROCE versus its past performance, but arguably the future is more important. If you are interested, you can read the analyst forecasts in our for free Report on analyst forecast for the company.
What does the ROCE trend tell us for Franklin Electric?
We like the trends we see from Franklin Electric. The data shows that returns on investments have increased significantly to 15% over the past five years. The company is effectively making more money per dollar wagered, and it’s worth noting that its principal is also up 29%. The increasing returns on a growing amount of capital are common with multi-excavators and that’s why we’re impressed.
It should be noted, however, that the company’s short-term liabilities increased noticeably in the reporting period, so we attribute part of the ROCE growth to them. Short-term liabilities have risen to 26% of total assets, so the company is now financed more by suppliers or short-term creditors. Watch out for future increases, because a particularly high ratio of short-term liabilities to total assets can bring new risks to the business.
What we can learn from Franklin Electric’s ROCE
A company that can increase its ROI and consistently reinvest in itself is a very sought-after trait, and that is exactly what Franklin Electric has. And since the stock has performed exceptionally well over the past five years, these patterns are kept in mind by investors. With that in mind, we still believe the company deserves further due diligence given the promising fundamentals.
One more thing to note, we’ve identified it 1 warning sign with Franklin Electric and that understanding should be part of your investment process.
For those who like to invest solid companies, look at that for free List of companies with solid balance sheets and high returns on equity.
This article from Simply Wall St is of a general nature. We only provide comments based on historical data and analyst projections using an unbiased methodology, and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks and does not take into account your goals or your financial situation. Our goal is to provide you with long-term, focused analysis based on fundamentals. Note that our analysis may not take into account the latest company announcements or quality material, which may be sensitive to the price. Simply Wall St has no position in any of the stocks mentioned.
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