Returns On Capital At FGI Industries (NASDAQ:FGI) Paint A Concerning Picture
What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at FGI Industries (NASDAQ:FGI) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What Is It?
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 FGI Industries:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.054 = US$2.0m ÷ (US$69m - US$32m) (Based on the trailing twelve months to March 2024).
Thus, FGI Industries has an ROCE of 5.4%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 13%.
See our latest analysis for FGI Industries
In the above chart we have measured FGI Industries' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for FGI Industries .
What Can We Tell From FGI Industries' ROCE Trend?
In terms of FGI Industries' historical ROCE movements, the trend isn't fantastic. Over the last four years, returns on capital have decreased to 5.4% from 33% four years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
On a side note, FGI Industries has done well to pay down its current liabilities to 46% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 46% is still pretty high, so those risks are still somewhat prevalent.
The Bottom Line
In summary, we're somewhat concerned by FGI Industries' diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 49% from where it was year ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
One final note, you should learn about the 5 warning signs we've spotted with FGI Industries (including 3 which don't sit too well with us) .
While FGI Industries 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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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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