Fsilon Furnishing and Construction Materials (SHSE:605318) Could Be Struggling To Allocate Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. In light of that, when we looked at Fsilon Furnishing and Construction Materials (SHSE:605318) and its ROCE trend, we weren't exactly thrilled.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Fsilon Furnishing and Construction Materials:

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

0.0024 = CN¥2.0m ÷ (CN¥1.2b - CN¥372m) (Based on the trailing twelve months to September 2023).

Thus, Fsilon Furnishing and Construction Materials has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 8.3%.

See our latest analysis for Fsilon Furnishing and Construction Materials

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 Fsilon Furnishing and Construction Materials' past further, check out this free graph covering Fsilon Furnishing and Construction Materials' past earnings, revenue and cash flow.

What Can We Tell From Fsilon Furnishing and Construction Materials' ROCE Trend?

On the surface, the trend of ROCE at Fsilon Furnishing and Construction Materials doesn't inspire confidence. Over the last five years, returns on capital have decreased to 0.2% from 30% five years ago. However it looks like Fsilon Furnishing and Construction Materials might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

In summary, Fsilon Furnishing and Construction Materials is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be recognizing these trends since the stock has only returned a total of 8.4% to shareholders over the last three years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you'd like to know more about Fsilon Furnishing and Construction Materials, we've spotted 3 warning signs, and 2 of them make us uncomfortable.

While Fsilon Furnishing and Construction Materials isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.