Focus Lighting and Fixtures' (NSE:FOCUS) Returns On Capital Not Reflecting Well On The Business

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So while Focus Lighting and Fixtures (NSE:FOCUS) has a high ROCE right now, lets see what we can decipher from how returns are changing.

Return On Capital Employed (ROCE): What Is It?

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)

0.28 = ₹400m ÷ (₹1.9b - ₹459m) (Based on the trailing twelve months to June 2024).

So, Focus Lighting and Fixtures has an ROCE of 28%. That's a fantastic return and not only that, it outpaces the average of 18% 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're interested in investigating Focus Lighting and Fixtures' past further, check out this free graph covering Focus Lighting and Fixtures' past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Focus Lighting and Fixtures, we didn't gain much confidence. While it's comforting that the ROCE is high, five years ago it was 35%. 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.

On a side note, Focus Lighting and Fixtures has done well to pay down its current liabilities to 24% 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 the stock has done incredibly well with a 1,135% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

Like most companies, Focus Lighting and Fixtures does come with some risks, and we've found 2 warning signs that you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.