If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we’d like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Fox Factory Holding (NASDAQ:FOXF), we don’t think it’s current trends fit the mold of a multi-bagger.
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. To calculate this metric for Fox Factory Holding, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.11 = US$116m ÷ (US$1.3b – US$174m) (Based on the trailing twelve months to October 2020).
Thus, Fox Factory Holding has an ROCE of 11%. In absolute terms, that’s a pretty normal return, and it’s somewhat close to the Auto Components industry average of 9.6%.
View our latest analysis for Fox Factory Holding
Above you can see how the current ROCE for Fox Factory Holding 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 Fox Factory Holding.
What Does the ROCE Trend For Fox Factory Holding Tell Us?
We weren’t thrilled with the trend because Fox Factory Holding’s ROCE has reduced by 45% over the last five years, while the business employed 405% more capital. Usually this isn’t ideal, but given Fox Factory Holding conducted a capital raising before their most recent earnings announcement, that would’ve likely contributed, at least partially, to the increased capital employed figure. Fox Factory Holding probably hasn’t received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt. Also, we found that by looking at the company’s latest EBIT, the figure is within 10% of the previous year’s EBIT so you can basically assign the ROCE drop primarily to that capital raise.
On a side note, Fox Factory Holding has done well to pay down its current liabilities to 14% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business’ efficiency at generating ROCE since it is now funding more of the operations with its own money.
The Bottom Line On Fox Factory Holding’s ROCE
In summary, despite lower returns in the short term, we’re encouraged to see that Fox Factory Holding is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 819% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we’d be optimistic on the stock going forward.
One more thing to note, we’ve identified 4 warning signs with Fox Factory Holding and understanding these should be part of your investment process.
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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This article by Simply Wall St is general in nature. 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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