Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Famous Brands' (JSE:FBR) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Famous Brands is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.37 = R750m ÷ (R3.1b - R1.1b) (Based on the trailing twelve months to August 2022).
So, Famous Brands has an ROCE of 37%. In absolute terms that's a great return and it's even better than the Hospitality industry average of 18%.
View our latest analysis for Famous Brands
Historical performance is a great place to start when researching a stock so above you can see the gauge for Famous Brands' ROCE against it's prior returns. If you'd like to look at how Famous Brands has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
You'd find it hard not to be impressed with the ROCE trend at Famous Brands. The figures show that over the last five years, returns on capital have grown by 98%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, Famous Brands appears to been achieving more with less, since the business is using 60% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 35% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.
In Conclusion...
In a nutshell, we're pleased to see that Famous Brands has been able to generate higher returns from less capital. Astute investors may have an opportunity here because the stock has declined 42% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.