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Firan Technology Group Corporation (TSE:FTG) Is Employing Capital Very Effectively

Simply Wall St

Today we are going to look at Firan Technology Group Corporation (TSE:FTG) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.

So, How Do We Calculate ROCE?

Analysts use this formula to calculate return on capital employed:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

Or for Firan Technology Group:

0.23 = CA$12m ÷ (CA$71m - CA$18m) (Based on the trailing twelve months to August 2019.)

Therefore, Firan Technology Group has an ROCE of 23%.

Check out our latest analysis for Firan Technology Group

Does Firan Technology Group Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Firan Technology Group's ROCE appears to be substantially greater than the 15% average in the Electronic industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Setting aside the comparison to its industry for a moment, Firan Technology Group's ROCE in absolute terms currently looks quite high.

You can click on the image below to see (in greater detail) how Firan Technology Group's past growth compares to other companies.

TSX:FTG Past Revenue and Net Income, November 18th 2019

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

What Are Current Liabilities, And How Do They Affect Firan Technology Group's ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Firan Technology Group has total liabilities of CA$18m and total assets of CA$71m. Therefore its current liabilities are equivalent to approximately 26% of its total assets. A minimal amount of current liabilities limits the impact on ROCE.

Our Take On Firan Technology Group's ROCE

With low current liabilities and a high ROCE, Firan Technology Group could be worthy of further investigation. There might be better investments than Firan Technology Group out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.