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Returns On Capital Signal Tricky Times Ahead For FGI Industries (NASDAQ:FGI)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 FGI Industries (NASDAQ:FGI) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for FGI Industries:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.16 = US$4.8m ÷ (US$63m - US$33m) (Based on the trailing twelve months to September 2022).

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Thus, FGI Industries has an ROCE of 16%. That's a pretty standard return and it's in line with the industry average of 16%.

View our latest analysis for FGI Industries

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In the above chart we have measured FGI Industries' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is FGI Industries' ROCE Trending?

When we looked at the ROCE trend at FGI Industries, we didn't gain much confidence. Over the last two years, returns on capital have decreased to 16% from 53% two years ago. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, FGI Industries has done well to pay down its current liabilities to 52% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 52% is still pretty high, so those risks are still somewhat prevalent.

Our Take On FGI Industries' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that FGI Industries is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 41% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

FGI Industries does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is significant...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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