Fielmann (ETR:FIE) May Have Issues Allocating Its Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Although, when we looked at Fielmann (ETR:FIE), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Fielmann:

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

0.16 = €217m ÷ (€1.8b - €390m) (Based on the trailing twelve months to March 2022).

Thus, Fielmann has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 10% generated by the Specialty Retail industry.

View our latest analysis for Fielmann

In the above chart we have measured Fielmann's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Fielmann.

What Does the ROCE Trend For Fielmann Tell Us?

When we looked at the ROCE trend at Fielmann, we didn't gain much confidence. Around five years ago the returns on capital were 33%, but since then they've fallen to 16%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Fielmann's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Fielmann. And there could be an opportunity here if other metrics look good too, because the stock has declined 25% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

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

While Fielmann isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.