There Are Reasons To Feel Uneasy About Fenix Outdoor International's (STO:FOI B) Returns On Capital

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'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Fenix Outdoor International (STO:FOI B) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Fenix Outdoor International:

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

0.16 = €83m ÷ (€675m - €147m) (Based on the trailing twelve months to December 2022).

Therefore, Fenix Outdoor International has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Specialty Retail industry average of 8.7% it's much better.

Check out our latest analysis for Fenix Outdoor International

In the above chart we have measured Fenix Outdoor International's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Fenix Outdoor International here for free.

What Does the ROCE Trend For Fenix Outdoor International Tell Us?

When we looked at the ROCE trend at Fenix Outdoor International, we didn't gain much confidence. Around five years ago the returns on capital were 34%, but since then they've fallen to 16%. 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. 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 22% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Fenix Outdoor International. These growth trends haven't led to growth returns though, since the stock has fallen 14% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing: We've identified 2 warning signs with Fenix Outdoor International (at least 1 which doesn't sit too well with us) , and understanding these would certainly be useful.

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.