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. Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it’s a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Ergo, when we looked at the ROCE trends at Firefly (STO:FIRE), we liked what we saw.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Firefly, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.29 = kr39m ÷ (kr219m – kr86m) (Based on the trailing twelve months to December 2022).
Thus, Firefly has an ROCE of 29%. In absolute terms that’s a great return and it’s even better than the Electronic industry average of 12%.
See our latest analysis for Firefly
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Firefly, check out these free graphs here.
SWOT Analysis for Firefly
- Earnings growth over the past year underperformed the Electronic industry.
- Dividend is low compared to the top 25% of dividend payers in the Electronic market.
- Current share price is above our estimate of fair value.
- FIRE’s financial characteristics indicate limited near-term opportunities for shareholders.
- Lack of analyst coverage makes it difficult to determine FIRE’s earnings prospects.
- Paying a dividend but company has no free cash flows.
What The Trend Of ROCE Can Tell Us
It’s hard not to be impressed by Firefly’s returns on capital. The company has employed 107% more capital in the last five years, and the returns on that capital have remained stable at 29%. Now considering ROCE is an attractive 29%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. You’ll see this when looking at well operated businesses or favorable business models.
What We Can Learn From Firefly’s ROCE
In short, we’d argue Firefly has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And long term investors would be thrilled with the 232% return they’ve received over the last five years. So even though the stock might be more “expensive” than it was before, we think the strong fundamentals warrant this stock for further research.
One more thing: We’ve identified 3 warning signs with Firefly (at least 1 which is a bit concerning) , and understanding these would certainly be useful.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
Valuation is complex, but we’re helping make it simple.
Find out whether Firefly is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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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.
