If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Fos (BIT:FOS), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What is it?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Fos, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.079 = €980k ÷ (€18m - €5.3m) (Based on the trailing twelve months to June 2020).
Therefore, Fos has an ROCE of 7.9%. Even though it's in line with the industry average of 7.9%, it's still a low return by itself.
Check out our latest analysis for Fos
In the above chart we have measured Fos' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Fos.
The Trend Of ROCE
When we looked at the ROCE trend at Fos, we didn't gain much confidence. To be more specific, ROCE has fallen from 12% over the last two years. 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.
The Bottom Line
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Fos. And there could be an opportunity here if other metrics look good too, because the stock has declined 17% in the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
One more thing: We've identified 3 warning signs with Fos (at least 2 which make us uncomfortable) , and understanding them would certainly be useful.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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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About BIT:FOS
Excellent balance sheet and good value.
