Returns On Capital Signal Tricky Times Ahead For Fenix Outdoor International (STO:FOI B)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Fenix Outdoor International (STO:FOI B) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

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 Fenix Outdoor International is:

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

0.16 = €86m ÷ (€655m - €127m) (Based on the trailing twelve months to March 2022).

Thus, Fenix Outdoor International has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 13% generated by the Specialty Retail industry.

Check out our latest analysis for Fenix Outdoor International

Above you can see how the current ROCE for Fenix Outdoor International compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Fenix Outdoor International.

What Can We Tell From Fenix Outdoor International's ROCE Trend?

When we looked at the ROCE trend at Fenix Outdoor International, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 16% from 30% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Fenix Outdoor International 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Fenix Outdoor International's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Fenix Outdoor International is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 24% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

One more thing, we've spotted 1 warning sign facing Fenix Outdoor International that you might find interesting.

While Fenix Outdoor International 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. 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.