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Fox Factory Holding (NASDAQ:FOXF) Is Reinvesting At Lower Rates Of Return

·3 min read

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. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Fox Factory Holding (NASDAQ:FOXF) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. The formula for this calculation on Fox Factory Holding is:

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

0.15 = US$223m ÷ (US$1.7b - US$272m) (Based on the trailing twelve months to July 2022).

Thus, Fox Factory Holding has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 10.0% it's much better.

Check out our latest analysis for Fox Factory Holding

roce
roce

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, you can check out the forecasts from the analysts covering Fox Factory Holding here for free.

So How Is Fox Factory Holding's ROCE Trending?

In terms of Fox Factory Holding's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 23%, but since then they've fallen to 15%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Fox Factory Holding's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Fox Factory Holding. And long term investors must be optimistic going forward because the stock has returned a huge 196% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

Fox Factory Holding does have some risks, we noticed 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

While Fox Factory Holding 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.

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.

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