Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Speaking of which, we noticed some great changes in Fisco's (TYO:3807) returns on capital, so let's have a look.
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. The formula for this calculation on Fisco is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.025 = JP¥62m ÷ (JP¥2.7b - JP¥213m) (Based on the trailing twelve months to December 2020).
Therefore, Fisco has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Online Retail industry average of 17%.
View our latest analysis for Fisco
Historical performance is a great place to start when researching a stock so above you can see the gauge for Fisco's ROCE against it's prior returns. If you're interested in investigating Fisco's past further, check out this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
Like most people, we're pleased that Fisco is now generating some pretax earnings. While the business is profitable now, it used to be incurring losses on invested capital five years ago. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 77%. This could potentially mean that the company is selling some of its assets.
One more thing to note, Fisco has decreased current liabilities to 7.8% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.
The Key Takeaway
In the end, Fisco has proven it's capital allocation skills are good with those higher returns from less amount of capital. Given the stock has declined 53% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.
Fisco does have some risks, we noticed 5 warning signs (and 1 which can't be ignored) we think you should know about.
While Fisco isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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 TSE:3807
Medium-low with mediocre balance sheet.
