Finding a business that has the potential to grow significantly isn’t easy, but it is possible if we look at a few key financial metrics. First, we would like to identify a growth to return to on capital employed (ROCE) and at the same time, a based capital employed. Simply put, these types of businesses are slot machines, meaning they continually reinvest their profits at ever-higher rates of return. Therefore, when we briefly examined Funko’s (NASDAQ:FNKO) ROCE trend, we were pretty happy with what we saw.
Understanding return on capital employed (ROCE)
For those unaware, ROCE is a measure of a company’s annual pre-tax profit (yield), relative to the capital employed in the business. Analysts use this formula to calculate it for Funko:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.13 = $90 million ÷ ($915 million – $244 million) (Based on the last twelve months to September 2021).
So, Funko has a ROCE of 13%. That’s a relatively normal return on capital, and it’s around the 15% generated by the retail distributor industry.
Check out our latest analysis for Funko
Above, you can see how Funko’s current ROCE compares to its past returns on capital, but you can’t say anything about the past. If you’re interested, you can check out analyst forecasts in our free analyst forecast report for the company.
So what is Funko’s ROCE trend?
Although current capital returns are decent, they haven’t changed much. Over the past five years, ROCE has remained relatively stable at around 13% and the company has deployed 58% more capital into its operations. Since 13% is a moderate ROCE, it’s good to see that a company can continue to reinvest at these decent rates of return. Over long periods of time, returns like these may not be too exciting, but with consistency they can pay off in terms of stock price performance.
Our take on Funko’s ROCE
In the end, Funko has proven its ability to adequately reinvest capital at good rates of return. However, over the past three years, the stock hasn’t provided much growth to shareholders in terms of total returns. Therefore we think it would be worth taking this stock further given that the fundamentals are attractive.
Like most businesses, Funko comes with some risk, and we’ve found 1 warning sign of which you should be aware.
If you want to look for strong companies with excellent earnings, check out this free list of companies with strong balance sheets and impressive returns on equity.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.