How Good Is Future Lifestyle Fashions Limited (NSE:FLFL) At Creating Shareholder Value?

Today we are going to look at Future Lifestyle Fashions Limited (NSE:FLFL) to see whether it might be an attractive investment prospect. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.

So, How Do We Calculate ROCE?

The formula for calculating the return on capital employed is:

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

Or for Future Lifestyle Fashions:

0.12 = ₹4.2b ÷ (₹68b - ₹34b) (Based on the trailing twelve months to December 2019.)

So, Future Lifestyle Fashions has an ROCE of 12%.

Check out our latest analysis for Future Lifestyle Fashions

Does Future Lifestyle Fashions Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. We can see Future Lifestyle Fashions's ROCE is around the 14% average reported by the Specialty Retail industry. Setting aside the industry comparison for now, Future Lifestyle Fashions's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.

In our analysis, Future Lifestyle Fashions's ROCE appears to be 12%, compared to 3 years ago, when its ROCE was 7.9%. This makes us wonder if the company is improving. You can see in the image below how Future Lifestyle Fashions's ROCE compares to its industry. Click to see more on past growth.

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Future Lifestyle Fashions.

Do Future Lifestyle Fashions's Current Liabilities Skew Its ROCE?

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.

Future Lifestyle Fashions has current liabilities of ₹34b and total assets of ₹68b. As a result, its current liabilities are equal to approximately 50% of its total assets. Future Lifestyle Fashions's ROCE is improved somewhat by its moderate amount of current liabilities.

The Bottom Line On Future Lifestyle Fashions's ROCE

Unfortunately, its ROCE is still uninspiring, and there are potentially more attractive prospects out there. Of course, you might also be able to find a better stock than Future Lifestyle Fashions. So you may wish to see this free collection of other companies that have grown earnings strongly.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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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. Thank you for reading.