Stock Analysis

Capital Allocation Trends At Focus Lighting and Fixtures (NSE:FOCUS) Aren't Ideal

May 13, 2023

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Looking at Focus Lighting and Fixtures (NSE:FOCUS), it does have a high ROCE right now, but lets see how returns are trending.

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 Focus Lighting and Fixtures is:

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

0.31 = ₹303m ÷ (₹1.3b - ₹315m) (Based on the trailing twelve months to March 2023).

So, Focus Lighting and Fixtures has an ROCE of 31%. That's a fantastic return and not only that, it outpaces the average of 15% earned by companies in a similar industry.

Check out our latest analysis for Focus Lighting and Fixtures

Historical performance is a great place to start when researching a stock so above you can see the gauge for Focus Lighting and Fixtures' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Focus Lighting and Fixtures, check out these free graphs here.

SWOT Analysis for Focus Lighting and Fixtures

Strength

Earnings growth over the past year exceeded the industry.

Debt is well covered by earnings.

Balance sheet summary for FOCUS.

Weakness

Dividend is low compared to the top 25% of dividend payers in the Electrical market.

Current share price is above our estimate of fair value.

Shareholders have been diluted in the past year.

Opportunity

FOCUS' financial characteristics indicate limited near-term opportunities for shareholders.

Lack of analyst coverage makes it difficult to determine FOCUS' earnings prospects.

Threat

Debt is not well covered by operating cash flow.

Is FOCUS well equipped to handle threats?

So How Is Focus Lighting and Fixtures' ROCE Trending?

On the surface, the trend of ROCE at Focus Lighting and Fixtures doesn't inspire confidence. While it's comforting that the ROCE is high, five years ago it was 45%. 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.

On a side note, Focus Lighting and Fixtures has done well to pay down its current liabilities to 25% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Focus Lighting and Fixtures' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Focus Lighting and Fixtures is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 802% 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.

One final note, you should learn about the 4 warning signs we've spotted with Focus Lighting and Fixtures (including 1 which is significant) .

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.

Valuation is complex, but we're helping make it simple.

Find out whether Focus Lighting and Fixtures is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.