Is Future Lifestyle Fashions Limited’s (NSE:FLFL) 11% Return On Capital Employed Good News?

Today we’ll look at Future Lifestyle Fashions Limited (NSE:FLFL) and reflect on its potential as an investment. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First up, we’ll look at what ROCE is and how we calculate it. Then we’ll compare its ROCE to similar companies. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.

How Do You Calculate Return On Capital Employed?

The formula for calculating the return on capital employed is:

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

Or for Future Lifestyle Fashions:

0.11 = ₹3.9b ÷ (₹68b – ₹34b) (Based on the trailing twelve months to September 2019.)

So, Future Lifestyle Fashions has an ROCE of 11%.

See our latest analysis for Future Lifestyle Fashions

Does Future Lifestyle Fashions Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. It appears that Future Lifestyle Fashions’s ROCE is fairly close to the Specialty Retail industry average of 11%. Aside from the industry comparison, Future Lifestyle Fashions’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.

We can see that, Future Lifestyle Fashions currently has an ROCE of 11% compared to its ROCE 3 years ago, which was 8.2%. This makes us think the business might be improving. You can see in the image below how Future Lifestyle Fashions’s ROCE compares to its industry.

NSEI:FLFL Past Revenue and Net Income, December 10th 2019
NSEI:FLFL Past Revenue and Net Income, December 10th 2019

It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

Do Future Lifestyle Fashions’s Current Liabilities Skew Its ROCE?

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Future Lifestyle Fashions has total liabilities of ₹34b and total assets of ₹68b. Therefore its current liabilities are equivalent to approximately 50% of its total assets. Future Lifestyle Fashions’s middling level of current liabilities have the effect of boosting its ROCE a bit.

Our Take On Future Lifestyle Fashions’s ROCE

With this level of liabilities and a mediocre ROCE, there are potentially better investments out there. You might be able to find a better investment than Future Lifestyle Fashions. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

I will like Future Lifestyle Fashions better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.