Fnac Darty (EPA:FNAC) Could Be Struggling To Allocate Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Fnac Darty (EPA:FNAC) and its ROCE trend, we weren't exactly thrilled.

Understanding 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 Fnac Darty:

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

0.063 = €230m ÷ (€6.7b - €3.1b) (Based on the trailing twelve months to December 2022).

Thus, Fnac Darty has an ROCE of 6.3%. In absolute terms, that's a low return but it's around the Specialty Retail industry average of 7.4%.

See our latest analysis for Fnac Darty

Above you can see how the current ROCE for Fnac Darty 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 The Trend Of ROCE Can Tell Us

In terms of Fnac Darty's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 11%, but since then they've fallen to 6.3%. However it looks like Fnac Darty might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Another thing to note, Fnac Darty has a high ratio of current liabilities to total assets of 46%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Fnac Darty's ROCE

To conclude, we've found that Fnac Darty is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 57% in the last five years. Therefore based on the analysis done in this article, we don't think Fnac Darty has the makings of a multi-bagger.

Fnac Darty does have some risks though, and we've spotted 2 warning signs for Fnac Darty that you might be interested in.

While Fnac Darty 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.