The Returns On Capital At Affluent Foundation Holdings (HKG:1757) Don't Inspire Confidence

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Affluent Foundation Holdings (HKG:1757) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. 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 return on capital but it's in line with the industry's average returns of 8.5%.

Check out 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'd like to look at how Affluent Foundation Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Affluent Foundation Holdings' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 8.5% from 44% five years ago. 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 separate but related note, it's important to know that Affluent Foundation Holdings has a current liabilities to total assets ratio of 62%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Affluent Foundation Holdings' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Affluent Foundation Holdings.

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