There Are Reasons To Feel Uneasy About Fulham Shore's (LON:FUL) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. However, after investigating Fulham Shore (LON:FUL), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Fulham Shore is:

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

0.023 = UK£2.9m ÷ (UK£164m - UK£36m) (Based on the trailing twelve months to September 2022).

Therefore, Fulham Shore has an ROCE of 2.3%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 6.8%.

Check out our latest analysis for Fulham Shore

In the above chart we have measured Fulham Shore'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 Fulham Shore.

SWOT Analysis for Fulham Shore

So How Is Fulham Shore's ROCE Trending?

When we looked at the ROCE trend at Fulham Shore, we didn't gain much confidence. To be more specific, ROCE has fallen from 3.3% over the last five years. 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.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Fulham Shore is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 21% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

One more thing, we've spotted 2 warning signs facing Fulham Shore that you might find interesting.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.