FIGS (NYSE:FIGS) May Have Issues Allocating Its Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Although, when we looked at FIGS (NYSE:FIGS), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for FIGS:

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

0.058 = US$26m ÷ (US$526m - US$77m) (Based on the trailing twelve months to June 2024).

So, FIGS has an ROCE of 5.8%. Ultimately, that's a low return and it under-performs the Luxury industry average of 13%.

See our latest analysis for FIGS

In the above chart we have measured FIGS' 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 FIGS for free.

What Can We Tell From FIGS' ROCE Trend?

On the surface, the trend of ROCE at FIGS doesn't inspire confidence. To be more specific, ROCE has fallen from 40% over the last four years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, FIGS has done well to pay down its current liabilities to 15% of total assets. So we could link some of this to the decrease in ROCE. 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 Key Takeaway

To conclude, we've found that FIGS is reinvesting in the business, but returns have been falling. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 82% over the last three years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you're still interested in FIGS it's worth checking out our FREE intrinsic value approximation for FIGS to see if it's trading at an attractive price in other respects.

While FIGS 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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