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Are Fox Factory Holding Corp.’s (NASDAQ:FOXF) High Returns Really That Great?

Simply Wall St

Today we'll look at Fox Factory Holding Corp. (NASDAQ:FOXF) and reflect on its potential as an investment. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.

So, How Do We Calculate ROCE?

The formula for calculating the return on capital employed is:

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

Or for Fox Factory Holding:

0.22 = US$106m ÷ (US$580m - US$106m) (Based on the trailing twelve months to June 2019.)

Therefore, Fox Factory Holding has an ROCE of 22%.

See our latest analysis for Fox Factory Holding

Does Fox Factory Holding Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Fox Factory Holding's ROCE is meaningfully better than the 15% average in the Auto Components industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Setting aside the comparison to its industry for a moment, Fox Factory Holding's ROCE in absolute terms currently looks quite high.

You can click on the image below to see (in greater detail) how Fox Factory Holding's past growth compares to other companies.

NasdaqGS:FOXF Past Revenue and Net Income, September 20th 2019

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Fox Factory Holding.

Fox Factory Holding's Current Liabilities And Their Impact On Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Fox Factory Holding has total assets of US$580m and current liabilities of US$106m. As a result, its current liabilities are equal to approximately 18% of its total assets. The fairly low level of current liabilities won't have much impact on the already great ROCE.

Our Take On Fox Factory Holding's ROCE

, Fox Factory Holding looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.

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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.

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. Thank you for reading.