Foxconn Industrial Internet (SHSE:601138) Will Be Hoping To Turn Its Returns On Capital Around

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Foxconn Industrial Internet (SHSE:601138) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Foxconn Industrial Internet:

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

0.15 = CN¥22b ÷ (CN¥277b - CN¥125b) (Based on the trailing twelve months to March 2024).

Therefore, Foxconn Industrial Internet has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 5.2% generated by the Electronic industry.

Check out our latest analysis for Foxconn Industrial Internet

In the above chart we have measured Foxconn Industrial Internet's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Foxconn Industrial Internet .

How Are Returns Trending?

We weren't thrilled with the trend because Foxconn Industrial Internet's ROCE has reduced by 43% over the last five years, while the business employed 102% more capital. That being said, Foxconn Industrial Internet raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Foxconn Industrial Internet probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a related note, Foxconn Industrial Internet has decreased its current liabilities to 45% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 45% is still pretty high, so those risks are still somewhat prevalent.

The Key Takeaway

To conclude, we've found that Foxconn Industrial Internet is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 163% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing, we've spotted 1 warning sign facing Foxconn Industrial Internet that you might find interesting.

While Foxconn Industrial Internet may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.

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