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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Although, when we looked at Fuller Smith & Turner (LON:FSTA), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Fuller Smith & Turner is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.055 = UK£36m ÷ (UK£723m - UK£65m) (Based on the trailing twelve months to March 2024).
So, Fuller Smith & Turner has an ROCE of 5.5%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 7.5%.
View our latest analysis for Fuller Smith & Turner
Above you can see how the current ROCE for Fuller Smith & Turner 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 Fuller Smith & Turner for free.
So How Is Fuller Smith & Turner's ROCE Trending?
There hasn't been much to report for Fuller Smith & Turner's returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Fuller Smith & Turner doesn't end up being a multi-bagger in a few years time. With fewer investment opportunities, it makes sense that Fuller Smith & Turner has been paying out a decent 58% of its earnings to shareholders. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.
Our Take On Fuller Smith & Turner's ROCE
In summary, Fuller Smith & Turner isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has declined 18% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Fuller Smith & Turner has the makings of a multi-bagger.