Shift4 Payments (NYSE:FOUR) May Have Issues Allocating Its Capital

By
Simply Wall St
Published
May 12, 2022
NYSE:FOUR
Source: Shutterstock

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Shift4 Payments (NYSE:FOUR) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Shift4 Payments is:

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

0.0012 = US$2.7m ÷ (US$2.4b - US$259m) (Based on the trailing twelve months to March 2022).

So, Shift4 Payments has an ROCE of 0.1%. Ultimately, that's a low return and it under-performs the IT industry average of 12%.

See our latest analysis for Shift4 Payments

roce
NYSE:FOUR Return on Capital Employed May 12th 2022

Above you can see how the current ROCE for Shift4 Payments compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Shift4 Payments' ROCE Trending?

In terms of Shift4 Payments' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 1.6% over the last three years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Shift4 Payments is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 50% in the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

On a separate note, we've found 2 warning signs for Shift4 Payments you'll probably want to know about.

While Shift4 Payments 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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