Investors Could Be Concerned With Affluent Foundation Holdings' (HKG:1757) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. In light of that, when we looked at Affluent Foundation Holdings (HKG:1757) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Affluent Foundation Holdings is:

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

0.085 = HK$7.2m ÷ (HK$224m - HK$139m) (Based on the trailing twelve months to September 2021).

So, Affluent Foundation Holdings has an ROCE of 8.5%. On its own, that's a low figure but it's around the 8.7% average generated by the Construction industry.

View our latest analysis for Affluent Foundation Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Affluent Foundation Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Affluent Foundation Holdings, check out these free graphs here.

So How Is Affluent Foundation Holdings' ROCE Trending?

On the surface, the trend of ROCE at Affluent Foundation Holdings doesn't inspire confidence. Around five years ago the returns on capital were 44%, but since then they've fallen to 8.5%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Affluent Foundation Holdings' current liabilities are still rather high at 62% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Affluent Foundation Holdings is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 7.0% over the last three years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

On a separate note, we've found 2 warning signs for Affluent Foundation Holdings you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.