Here's What's Concerning About Fullwealth International Group Holdings' (HKG:1034) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. 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 Fullwealth International Group Holdings (HKG:1034) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

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. To calculate this metric for Fullwealth International Group Holdings, this is the formula:

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

0.078 = HK$17m ÷ (HK$259m - HK$46m) (Based on the trailing twelve months to June 2023).

Thus, Fullwealth International Group Holdings has an ROCE of 7.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.3%.

See our latest analysis for Fullwealth International Group 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'd like to look at how Fullwealth International Group Holdings has performed in the past in other metrics, you can view this free graph of Fullwealth International Group Holdings' past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Fullwealth International Group Holdings, we didn't gain much confidence. To be more specific, ROCE has fallen from 28% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Fullwealth International Group Holdings has done well to pay down its current liabilities to 18% 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. 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 Bottom Line On Fullwealth International Group Holdings' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Fullwealth International Group Holdings have fallen, meanwhile the business is employing more capital than it was five years ago. We expect this has contributed to the stock plummeting 91% during the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know more about Fullwealth International Group Holdings, we've spotted 3 warning signs, and 1 of them shouldn't be ignored.

While Fullwealth International Group Holdings 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.