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Fenix Outdoor International AG (STO:FOI B) Earns Among The Best Returns In Its Industry

Simply Wall St

Today we'll evaluate Fenix Outdoor International AG (STO:FOI B) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.

So, How Do We Calculate ROCE?

Analysts use this formula to calculate return on capital employed:

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

Or for Fenix Outdoor International:

0.20 = €87m ÷ (€548m - €112m) (Based on the trailing twelve months to September 2019.)

Therefore, Fenix Outdoor International has an ROCE of 20%.

Check out our latest analysis for Fenix Outdoor International

Does Fenix Outdoor International Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Fenix Outdoor International's ROCE is meaningfully better than the 9.2% average in the Specialty Retail industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the comparison to its industry for a moment, Fenix Outdoor International's ROCE in absolute terms currently looks quite high.

Fenix Outdoor International's current ROCE of 20% is lower than its ROCE in the past, which was 31%, 3 years ago. This makes us wonder if the business is facing new challenges. You can see in the image below how Fenix Outdoor International's ROCE compares to its industry. Click to see more on past growth.

OM:FOI B Past Revenue and Net Income, December 25th 2019

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Fenix Outdoor International.

Do Fenix Outdoor International's Current Liabilities Skew Its ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.

Fenix Outdoor International has total liabilities of €112m and total assets of €548m. Therefore its current liabilities are equivalent to approximately 20% of its total assets. The fairly low level of current liabilities won't have much impact on the already great ROCE.

The Bottom Line On Fenix Outdoor International's ROCE

With low current liabilities and a high ROCE, Fenix Outdoor International could be worthy of further investigation. Fenix Outdoor International shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.

I will like Fenix Outdoor International better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.