What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at FIGS (NYSE:FIGS) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for FIGS:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = US$50m ÷ (US$354m - US$58m) (Based on the trailing twelve months to June 2022).
So, FIGS has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 9.2% generated by the Medical Equipment industry.
Above you can see how the current ROCE for FIGS compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is FIGS' ROCE Trending?
When we looked at the ROCE trend at FIGS, we didn't gain much confidence. To be more specific, ROCE has fallen from 40% over the last two years. 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. If these investments prove successful, this can bode very well for long term stock performance.
On a side note, FIGS has done well to pay down its current liabilities to 16% of total assets. So we could link some of this to the decrease in ROCE. 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
The Key Takeaway
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for FIGS. Despite these promising trends, the stock has collapsed 75% over the last year, so there could be other factors hurting the company's prospects. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for FIGS (of which 1 is a bit unpleasant!) that you should know about.
While FIGS isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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