We Like These Underlying Return On Capital Trends At Fashionette (ETR:FSNT)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. With that in mind, we've noticed some promising trends at Fashionette (ETR:FSNT) so let's look a bit deeper.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Fashionette:

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

0.043 = €2.8m ÷ (€77m - €12m) (Based on the trailing twelve months to June 2021).

Therefore, Fashionette has an ROCE of 4.3%. In absolute terms, that's a low return but it's around the Online Retail industry average of 5.3%.

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.

What Can We Tell From Fashionette's ROCE Trend?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The numbers show that in the last four years, the returns generated on capital employed have grown considerably to 4.3%. Basically the business is earning more per dollar of capital invested and in addition to that, 103% more capital is being employed now too. So we're very much inspired by what we're seeing at Fashionette thanks to its ability to profitably reinvest capital.

Our Take On Fashionette's ROCE

All in all, it's terrific to see that Fashionette is reaping the rewards from prior investments and is growing its capital base. And since the stock has fallen 54% over the last year, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Like most companies, Fashionette does come with some risks, and we've found 3 warning signs that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.