We're Watching These Trends At F.I.L.A. - Fabbrica Italiana Lapis ed Affini (BIT:FILA)

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'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. However, after investigating F.I.L.A. - Fabbrica Italiana Lapis ed Affini (BIT:FILA), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for F.I.L.A. - Fabbrica Italiana Lapis ed Affini:

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

0.07 = €68m ÷ (€1.2b - €217m) (Based on the trailing twelve months to September 2020).

Therefore, F.I.L.A. - Fabbrica Italiana Lapis ed Affini has an ROCE of 7.0%. Even though it's in line with the industry average of 7.0%, it's still a low return by itself.

View 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'd like, you can check out the forecasts from the analysts covering F.I.L.A. - Fabbrica Italiana Lapis ed Affini here for free.

How Are Returns Trending?

On the surface, the trend of ROCE at F.I.L.A. - Fabbrica Italiana Lapis ed Affini doesn't inspire confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 7.0%. And considering revenue has dropped while employing more capital, we'd be cautious. 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.

On a side note, F.I.L.A. - Fabbrica Italiana Lapis ed Affini has done well to pay down its current liabilities to 18% 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.

The Bottom Line

In summary, we're somewhat concerned by F.I.L.A. - Fabbrica Italiana Lapis ed Affini's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 12% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we found 3 warning signs for F.I.L.A. - Fabbrica Italiana Lapis ed Affini (1 is concerning) you should be aware of.

While F.I.L.A. - Fabbrica Italiana Lapis ed Affini may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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