Fossil Group (NASDAQ:FOSL) Might Have The Makings Of A Multi-Bagger

If you're looking for a multi-bagger, there's a few things to keep an eye out 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Fossil Group (NASDAQ:FOSL) and its trend of ROCE, we really liked what we saw.

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 Fossil Group is:

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

0.10 = US$88m ÷ (US$1.3b - US$421m) (Based on the trailing twelve months to July 2022).

Thus, Fossil Group has an ROCE of 10%. In isolation, that's a pretty standard return but against the Luxury industry average of 15%, it's not as good.

Check out the opportunities and risks within the US Luxury industry.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Fossil Group's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Fossil Group, check out these free graphs here.

The Trend Of ROCE

You'd find it hard not to be impressed with the ROCE trend at Fossil Group. The data shows that returns on capital have increased by 45% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, Fossil Group appears to been achieving more with less, since the business is using 37% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

The Key Takeaway

In summary, it's great to see that Fossil Group has been able to turn things around and earn higher returns on lower amounts of capital. Given the stock has declined 58% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a separate note, we've found 1 warning sign for Fossil Group you'll probably want to know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.