Yahoo Finance Focusrite (LON:TUNE) Knows How To Allocate Capital Effectively
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. And in light of that, the trends we're seeing at Focusrite's (LON:TUNE) look very promising so lets take a look.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Focusrite, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.47 = UK£39m ÷ (UK£104m - UK£21m) (Based on the trailing twelve months to February 2021).
So, Focusrite has an ROCE of 47%. In absolute terms that's a great return and it's even better than the Consumer Durables industry average of 9.1%.
View our latest analysis for Focusrite
Above you can see how the current ROCE for Focusrite compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Focusrite.
How Are Returns Trending?
The trends we've noticed at Focusrite are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 47%. Basically the business is earning more per dollar of capital invested and in addition to that, 297% more capital is being employed now too. So we're very much inspired by what we're seeing at Focusrite thanks to its ability to profitably reinvest capital.
On a related note, the company's ratio of current liabilities to total assets has decreased to 20%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Focusrite has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
The Bottom Line
To sum it up, Focusrite has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Focusrite can keep these trends up, it could have a bright future ahead.
One more thing: We've identified 3 warning signs with Focusrite (at least 1 which can't be ignored) , and understanding them would certainly be useful.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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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