Fulham Shore (LON:FUL) Is Reinvesting At Lower Rates Of Return
There are a few key trends to look for if we want to identify the next multi-bagger. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Fulham Shore (LON:FUL), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Fulham Shore, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.023 = UK£2.9m ÷ (UK£164m - UK£36m) (Based on the trailing twelve months to September 2022).
Therefore, Fulham Shore has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 6.8%.
View our latest analysis for Fulham Shore
In the above chart we have measured Fulham Shore's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Fulham Shore.
So How Is Fulham Shore's ROCE Trending?
In terms of Fulham Shore's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 3.3%, but since then they've fallen to 2.3%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
In Conclusion...
While returns have fallen for Fulham Shore in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 11% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.
One more thing to note, we've identified 2 warning signs with Fulham Shore 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.
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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