Fossil Group's (NASDAQ:FOSL) Returns Have Hit A Wall

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Fossil Group (NASDAQ:FOSL), we don't think it's current trends fit the mold of a multi-bagger.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the 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)

0.098 = US$80m ÷ (US$1.3b - US$522m) (Based on the trailing twelve months to July 2021).

Thus, Fossil Group has an ROCE of 9.8%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 13%.

See our latest analysis for Fossil Group

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're interested in investigating Fossil Group's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Fossil Group's ROCE Trend?

Over the past five years, Fossil Group's ROCE has remained relatively flat while the business is using 55% less capital than before. When a company effectively decreases its assets base, it's not usually a sign to be optimistic on that company. In addition to that, since the ROCE doesn't scream "quality" at 9.8%, it's hard to get excited about these developments.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 39% of total assets, this reported ROCE would probably be less than9.8% because total capital employed would be higher.The 9.8% ROCE could be even lower if current liabilities weren't 39% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.

What We Can Learn From Fossil Group's ROCE

Overall, we're not ecstatic to see Fossil Group reducing the amount of capital it employs in the business. And in the last five years, the stock has given away 59% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Fossil Group has the makings of a multi-bagger.

Fossil Group does have some risks, we noticed 2 warning signs (and 1 which is significant) we think you should know about.

While Fossil Group 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.

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.

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