Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. So when we looked at Fossil Group (NASDAQ:FOSL) and its trend of ROCE, we really liked what we saw.
What is 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. Analysts use this formula to calculate it for Fossil Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = US$117m ÷ (US$1.3b - US$433m) (Based on the trailing twelve months to April 2022).
So, Fossil Group has an ROCE of 14%. That's a relatively normal return on capital, and it's around the 15% generated by the Luxury industry.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Fossil Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From Fossil Group's ROCE Trend?
We're pretty happy with how the ROCE has been trending at Fossil Group. We found that the returns on capital employed over the last five years have risen by 94%. The company is now earning US$0.1 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 51% less capital than it was five years ago. Fossil Group may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 34% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.
In the end, Fossil Group has proven it's capital allocation skills are good with those higher returns from less amount of capital. Astute investors may have an opportunity here because the stock has declined 46% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.
On a final note, we've found 2 warning signs for Fossil Group that we think you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here