The Return Trends At Fashionette (ETR:FSNT) Look Promising

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Fashionette's (ETR:FSNT) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Fashionette, this is the formula:

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

0.029 = €1.8m ÷ (€90m - €27m) (Based on the trailing twelve months to June 2022).

Therefore, Fashionette has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Online Retail industry average of 7.1%.

View our latest analysis for Fashionette

In the above chart we have measured Fashionette's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Fashionette here for free.

So How Is Fashionette's ROCE Trending?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 2.9%. Basically the business is earning more per dollar of capital invested and in addition to that, 94% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Fashionette has. Although the company may be facing some issues elsewhere since the stock has plunged 78% in the last year. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

If you want to continue researching Fashionette, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Fashionette may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.