Returns On Capital At Focusrite (LON:TUNE) Paint An Interesting Picture

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Looking at Focusrite (LON:TUNE), it does have a high ROCE right now, but lets see how returns are trending.

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. Analysts use this formula to calculate it for Focusrite:

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

0.25 = UK£20m ÷ (UK£105m - UK£26m) (Based on the trailing twelve months to August 2020).

Therefore, Focusrite has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Consumer Durables industry average of 6.7%.

See our latest analysis for Focusrite

In the above chart we have measured Focusrite'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 Focusrite here for free.

So How Is Focusrite's ROCE Trending?

In terms of Focusrite's historical ROCE movements, the trend isn't fantastic. While it's comforting that the ROCE is high, five years ago it was 36%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Focusrite'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 Focusrite. And long term investors must be optimistic going forward because the stock has returned a huge 608% to shareholders in the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

On a final note, we've found 3 warning signs for Focusrite that we think you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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This article by Simply Wall St is general in nature. 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.
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