Returns On Capital At F.I.L.A. - Fabbrica Italiana Lapis ed Affini (BIT:FILA) Paint A Concerning Picture

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think F.I.L.A. - Fabbrica Italiana Lapis ed Affini (BIT:FILA) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 F.I.L.A. - Fabbrica Italiana Lapis ed Affini is:

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

0.095 = €91m ÷ (€1.2b - €228m) (Based on the trailing twelve months to September 2021).

Thus, F.I.L.A. - Fabbrica Italiana Lapis ed Affini has an ROCE of 9.5%. In absolute terms, that's a low return but it's around the Commercial Services industry average of 8.6%.

See our latest analysis for F.I.L.A. - Fabbrica Italiana Lapis ed Affini

Above you can see how the current ROCE for F.I.L.A. - Fabbrica Italiana Lapis ed Affini compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For F.I.L.A. - Fabbrica Italiana Lapis ed Affini Tell Us?

In terms of F.I.L.A. - Fabbrica Italiana Lapis ed Affini's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 13% over the last five years. However it looks like F.I.L.A. - Fabbrica Italiana Lapis ed Affini might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, F.I.L.A. - Fabbrica Italiana Lapis ed Affini has done well to pay down its current liabilities to 19% of total assets. So we could link some of this to the decrease in ROCE. 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 F.I.L.A. - Fabbrica Italiana Lapis ed Affini's ROCE

To conclude, we've found that F.I.L.A. - Fabbrica Italiana Lapis ed Affini is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 21% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing to note, we've identified 3 warning signs with F.I.L.A. - Fabbrica Italiana Lapis ed Affini and understanding them should be part of your investment process.

While F.I.L.A. - Fabbrica Italiana Lapis ed Affini isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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.

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