Returns On Capital At Forus (SNSE:FORUS) Paint A Concerning Picture

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after investigating Forus (SNSE:FORUS), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Forus:

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

0.026 = CL$6.6b ÷ (CL$296b - CL$38b) (Based on the trailing twelve months to December 2020).

Therefore, Forus has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 5.1%.

Check out our latest analysis for Forus

Above you can see how the current ROCE for Forus 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 report on analyst forecasts for the company.

What Can We Tell From Forus' ROCE Trend?

On the surface, the trend of ROCE at Forus doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.6% from 21% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line

We're a bit apprehensive about Forus because despite more capital being deployed in the business, returns on that capital and sales have both fallen. It should come as no surprise then that the stock has fallen 28% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Forus does have some risks though, and we've spotted 1 warning sign for Forus that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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