Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Furniweb Holdings' (HKG:8480) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Furniweb Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = RM25m ÷ (RM195m - RM34m) (Based on the trailing twelve months to June 2024).
Therefore, Furniweb Holdings has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 12% generated by the Luxury industry.
See our latest analysis for Furniweb Holdings
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Furniweb Holdings' past further, check out this free graph covering Furniweb Holdings' past earnings, revenue and cash flow.
What Can We Tell From Furniweb Holdings' ROCE Trend?
Furniweb Holdings has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 1,033% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
The Key Takeaway
To sum it up, Furniweb Holdings is collecting higher returns from the same amount of capital, and that's impressive. And since the stock has dived 95% over the last five years, there may be other factors affecting the company's prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.
One more thing: We've identified 3 warning signs with Furniweb Holdings (at least 2 which make us uncomfortable) , and understanding these would certainly be useful.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.