Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Fourace Industries Group Holdings (HKG:1455), we don't think it's current trends fit the mold of a multi-bagger.
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. The formula for this calculation on Fourace Industries Group Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.092 = HK$41m ÷ (HK$506m - HK$58m) (Based on the trailing twelve months to September 2024).
Therefore, Fourace Industries Group Holdings has an ROCE of 9.2%. In absolute terms, that's a low return and it also under-performs the Personal Products industry average of 14%.
See our latest analysis for Fourace Industries Group Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for Fourace Industries Group Holdings' ROCE against it's prior returns. If you'd like to look at how Fourace Industries Group Holdings has performed in the past in other metrics, you can view this free graph of Fourace Industries Group Holdings' past earnings, revenue and cash flow.
The Trend Of ROCE
On the surface, the trend of ROCE at Fourace Industries Group Holdings doesn't inspire confidence. Over the last five years, returns on capital have decreased to 9.2% from 25% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
On a related note, Fourace Industries Group Holdings has decreased its current liabilities to 12% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
The Key Takeaway
In summary, despite lower returns in the short term, we're encouraged to see that Fourace Industries Group Holdings 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 13% over the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
If you'd like to know more about Fourace Industries Group Holdings, we've spotted 2 warning signs, and 1 of them makes us a bit uncomfortable.
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.
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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.