Foraco International's Surging Profitability Catches Investor Attention

In the hunt for stocks with long-term compounding potential, investors often zero in on one critical metric: a consistently rising Return on Capital Employed (ROCE). Foraco International SA (TSE:FAR), a global provider of drilling services to the mining and water sectors, is currently painting a compelling picture on this front, suggesting its operational engine is hitting a higher gear.

ROCE measures how efficiently a company generates pre-tax profits from its capital base. Foraco's calculation tells a story of marked improvement: its ROCE now stands at 16%, derived from an EBIT of US$28 million against capital employed of US$175 million (total assets minus current liabilities, based on trailing twelve months to September 2025). This not only represents a satisfactory absolute return but dramatically outpaces the 4.5% average typical of the Metals and Mining industry.

The trajectory is what truly captivates analysts. Over the past five years, Foraco has managed to boost its ROCE by 53% while keeping its capital employed relatively stable. This indicates the company is squeezing substantially more profit from its existing asset base—a hallmark of improving operational efficiency and managerial acumen. This efficiency gain has been a likely contributor to the stock's staggering 501% total return for shareholders over the same period.

"The ROCE growth is undeniably impressive," notes Michael Thorne, a portfolio manager at Veritas Capital. "It shows management is executing well on its core operations. For a cyclical industry player, this kind of efficiency gain builds a much-needed buffer for when commodity prices soften."

However, the analysis isn't without caveats. A portion of the ROCE expansion coincides with a rise in current liabilities, which now fund about 34% of the business. Sarah Chen, an independent forensic accounting analyst, offers a more pointed view: "Let's not pop the champagne just yet. A significant increase in supplier financing is inflating the capital efficiency ratio. It's a clever short-term boost, but it also elevates liquidity risk. Investors should be asking how sustainable this is if interest rates climb or if supplier terms tighten."

Despite the note of caution, the overall fundamentals appear robust. The combination of flat capital investment and rising earnings suggests a company becoming more proficient. Foraco's management has signaled continued focus on high-margin contracts and technological adoption in drilling, which could support the ROCE trajectory.

"The market has clearly rewarded the transformation so far," adds David Reeves, a veteran mining sector investor. "The key question for future growth is whether they can replicate this operational excellence while scaling up. Their next capital deployment moves will be critical to watch."

As with any investment, due diligence is paramount. While the ROCE story is strong, potential investors are advised to consider the full spectrum of industry cyclicality, geopolitical risks inherent in global operations, and the company's specific growth plans.