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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. With that in mind, we've noticed some promising trends at Friedman Industries (NASDAQ:FRD) so let's look a bit deeper.
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Understanding Return On Capital Employed (ROCE)
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. The formula for this calculation on Friedman Industries is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.024 = US$4.0m ÷ (US$210m - US$42m) (Based on the trailing twelve months to December 2024).
So, Friedman Industries has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 9.5%.
View our latest analysis for Friedman Industries
Historical performance is a great place to start when researching a stock so above you can see the gauge for Friedman Industries' ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Friedman Industries.
How Are Returns Trending?
We're delighted to see that Friedman Industries is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 2.4% which is a sight for sore eyes. Not only that, but the company is utilizing 135% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
Our Take On Friedman Industries' ROCE
To the delight of most shareholders, Friedman Industries has now broken into profitability. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.