If you are looking for a multi-bagger, there are a few things to look out for. First, we will want to see a return on capital employed (ROCE) which increases and, on the other hand, a based capital employed. Basically, it means that a business has profitable initiatives that it can continue to reinvest in, which is a hallmark of a dialing machine. Although, when we considered Funko (NASDAQ: FNKO), it doesn’t appear to have ticked all of those boxes.
Understanding Return on Capital Employed (ROCE)
For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (its return), relative to the capital employed in the company. Analysts use this formula to calculate it for Funko:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.069 = US $ 43 million ÷ (US $ 769 million – US $ 139 million) (Based on the last twelve months up to March 2021).
Therefore, Funko has a ROCE of 6.9%. At the end of the day, that’s a low return, and it’s below the retail industry average of 13%.
See our latest review for Funko
In the graph above, we’ve measured Funko’s past ROCE versus past performance, but arguably the future is more important. If you’d like to see what analysts are forecasting for the future, you should check out our free report for Funko.
The ROCE trend
When we looked at the ROCE trend at Funko, we didn’t gain much trust. About five years ago, returns on capital were 13%, but since then they have fallen to 6.9%. On the flip side, the company has employed more capital with no corresponding improvement in sales over the past year, which might suggest that these investments are longer-term games. It may take some time for the business to begin to see a change in the benefits of these investments.
What we can learn from Funko’s ROCE
In summary, Funko is reinvesting funds into the business for growth, but sadly, it looks like sales haven’t grown much yet. Yet to long-term shareholders, the stock has offered them an incredible 106% return over the past three years, so the market seems bullish on its future. However, unless these underlying trends turn more positive, our hopes would not be too high.
Like most businesses, Funko comes with certain risks, and we’ve found 3 warning signs that you need to be aware of.
If you want to look for solid businesses with great income, check out this free list of companies with good balance sheets and impressive returns on equity.
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