Returns On Capital Signal Tricky Times Ahead For Funko (NASDAQ:FNKO)

By
Simply Wall St
Published
June 12, 2021
NasdaqGS:FNKO
Source: Shutterstock

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Although, when we looked at Funko (NASDAQ:FNKO), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Funko:

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

0.069 = US$43m ÷ (US$769m - US$139m) (Based on the trailing twelve months to March 2021).

Therefore, Funko has an ROCE of 6.9%. Ultimately, that's a low return and it under-performs the Retail Distributors industry average of 13%.

View our latest analysis for Funko

roce
NasdaqGS:FNKO Return on Capital Employed June 13th 2021

In the above chart we have measured Funko's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Funko.

The Trend Of ROCE

When we looked at the ROCE trend at Funko, we didn't gain much confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 6.9%. 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 may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Funko's ROCE

In summary, Funko is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Yet to long term shareholders the stock has gifted them an incredible 106% return in the last three years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Like most companies, Funko does come with some risks, and we've found 3 warning signs that you should be aware of.

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.

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