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What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Franklin Covey's (NYSE:FC) returns on capital, so let's have a look.
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 Franklin Covey:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.33 = US$29m ÷ (US$221m - US$134m) (Based on the trailing twelve months to February 2025).
Thus, Franklin Covey has an ROCE of 33%. That's a fantastic return and not only that, it outpaces the average of 16% earned by companies in a similar industry.
View our latest analysis for Franklin Covey
Above you can see how the current ROCE for Franklin Covey 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 analyst report for Franklin Covey .
The Trend Of ROCE
Franklin Covey has not disappointed in regards to ROCE growth. The figures show that over the last five years, returns on capital have grown by 370%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, Franklin Covey appears to been achieving more with less, since the business is using 23% less capital to run its operation. Franklin Covey 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. Effectively this means that suppliers or short-term creditors are now funding 61% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.
The Bottom Line
In summary, it's great to see that Franklin Covey has been able to turn things around and earn higher returns on lower amounts of capital. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. That being the case, research into the company's current valuation metrics and future prospects seems fitting.