Fourlis Holdings (ATH:FOYRK) Will Be Hoping To Turn Its Returns On Capital Around

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Having said that, from a first glance at Fourlis Holdings (ATH:FOYRK) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on Fourlis Holdings is:

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

0.016 = €6.6m ÷ (€637m - €213m) (Based on the trailing twelve months to December 2020).

Therefore, Fourlis Holdings has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 10%.

View our latest analysis for Fourlis Holdings

In the above chart we have measured Fourlis Holdings' 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 Fourlis Holdings.

How Are Returns Trending?

On the surface, the trend of ROCE at Fourlis Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 8.6% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

Our Take On Fourlis Holdings' ROCE

We're a bit apprehensive about Fourlis Holdings because despite more capital being deployed in the business, returns on that capital and sales have both fallen. In spite of that, the stock has delivered a 36% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Fourlis Holdings does have some risks though, and we've spotted 1 warning sign for Fourlis Holdings that you might be interested in.

While Fourlis Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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