Investors Could Be Concerned With Fox Factory Holding's (NASDAQ:FOXF) Returns On Capital
If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Fox Factory Holding (NASDAQ:FOXF) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. 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$128m ÷ (US$1.3b - US$165m) (Based on the trailing twelve months to January 2021).
Thus, Fox Factory Holding has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 9.3% generated by the Auto Components industry.
See 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, 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?
Unfortunately, the trend isn't great with ROCE falling from 21% five years ago, while capital employed has grown 450%. That being said, Fox Factory Holding raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Fox Factory Holding's earnings and if they change as a result from the capital raise.
On a related note, Fox Factory Holding has decreased its current liabilities to 13% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
In Conclusion...
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 738% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.
One more thing to note, we've identified 2 warning signs with Fox Factory Holding and understanding them should be part of your investment process.
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.
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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