Returns At Folangsi (HKG:2499) Appear To Be Weighed Down

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Folangsi (HKG:2499) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Folangsi, this is the formula:

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

0.079 = CN¥174m ÷ (CN¥3.5b - CN¥1.3b) (Based on the trailing twelve months to June 2024).

Therefore, Folangsi has an ROCE of 7.9%. On its own that's a low return, but compared to the average of 5.8% generated by the Trade Distributors industry, it's much better.

See our latest analysis for Folangsi

Historical performance is a great place to start when researching a stock so above you can see the gauge for Folangsi's ROCE against it's prior returns. If you're interested in investigating Folangsi's past further, check out this free graph covering Folangsi's past earnings, revenue and cash flow.

The Trend Of ROCE

There are better returns on capital out there than what we're seeing at Folangsi. The company has consistently earned 7.9% for the last five years, and the capital employed within the business has risen 87% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

What We Can Learn From Folangsi's ROCE

Long story short, while Folangsi has been reinvesting its capital, the returns that it's generating haven't increased. And in the last year, the stock has given away 50% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you want to know some of the risks facing Folangsi we've found 3 warning signs (2 are a bit unpleasant!) that you should be aware of before investing here.

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.