If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think FIH group (LON:FIH) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
What is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on FIH group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.041 = UK£2.9m ÷ (UK£79m - UK£8.2m) (Based on the trailing twelve months to September 2020).
Therefore, FIH group has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 10.0%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for FIH group's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of FIH group, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
In terms of FIH group's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 4.1% from 6.2% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
To conclude, we've found that FIH group is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 7.9% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
FIH group does have some risks, we noticed 3 warning signs (and 2 which are concerning) we think you should know about.
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. 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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