- Hong Kong
Golden Faith Group Holdings (HKG:2863) Might Be Having Difficulty Using Its Capital Effectively
If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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 Golden Faith Group Holdings (HKG:2863) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding 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 Golden Faith Group Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.051 = HK$16m ÷ (HK$369m - HK$62m) (Based on the trailing twelve months to September 2022).
Therefore, Golden Faith Group Holdings has an ROCE of 5.1%. Ultimately, that's a low return and it under-performs the Construction industry average of 7.0%.
View our latest analysis for Golden Faith 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 Golden Faith Group Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
On the surface, the trend of ROCE at Golden Faith Group Holdings doesn't inspire confidence. Around five years ago the returns on capital were 25%, but since then they've fallen to 5.1%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
On a side note, Golden Faith Group Holdings has done well to pay down its current liabilities to 17% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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
In summary, despite lower returns in the short term, we're encouraged to see that Golden Faith Group Holdings is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 57% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
One final note, you should learn about the 3 warning signs we've spotted with Golden Faith Group Holdings (including 1 which is significant) .
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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Find out whether Golden Faith Group Holdings is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
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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.
Golden Faith Group Holdings
Golden Faith Group Holdings Limited, an investment holding company, engages in the provision of electrical and mechanical engineering services in Hong Kong.
Flawless balance sheet with poor track record.