# What Should Investors Know About FSE Services Group Limited’s (HKG:331) Capital Returns?

The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and looking to gauge the potential return on investment in FSE Services Group Limited (HKG:331).

FSE Services Group stock represents an ownership share in the company. As a result, your investment is being put to work to fund operations and if you want to earn an attractive return on your investment, the business needs to be making an adequate amount of money from the funds you provide. This is because the actual cash flow generated by the business dictates the potential for income (dividends) and capital appreciation (price increases), which are the two ways to achieve positive returns when buying a stock. Therefore, looking at how efficiently FSE Services Group is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.

### Calculating Return On Capital Employed for 331

Choosing to invest in FSE Services Group comes at the cost of investing in another potentially favourable company. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business’ ability to grow your capital at a level that grants an investment over other companies. To determine FSE Services Group’s capital return we will use ROCE, which tells us how much the company makes from the capital employed in their operations (for things like machinery, wages etc). 331’s ROCE is calculated below:

ROCE Calculation for 331

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = HK\$221.70m ÷ (HK\$2.60b – HK\$1.61b) = 22.40%

The calculation above shows that 331’s earnings were 22.40% of capital employed. This makes FSE Services Group attractively profitable when compared to a robust 15% ROCE yardstick. So if this rate continues in to the future and is able to either provide solid dividends or reinvestment opportunities, your capital will enlarge at a quick rate over time.

### Not so fast

331 is efficient with the use of capital, but this is only the case if 331 continues to maintain the presently healthy ROCE, which will change if the company either earns less or requires more capital to create earnings. So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving. If you go back three years, you’ll find that 331’s ROCE has decreased from 31.79%. With this, the current earnings of HK\$221.70m improved from HK\$174.13m however capital employed has improved by a relatively larger volume in response to an increase in total assets , indicating that the previous growth in earnings has not been able to improve ROCE because the company now needs to employ more capital to operate the business.

### Next Steps

Although FSE Services Group’s ROCE has decreased over the past few years, the company still remains an attractive candidate that is capable of producing solid capital returns and a potentially strong return on investment. But don’t forget, return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and management ability. It’s important to account for these factors because you cannot be sure if the downward path is a signal to run, or just a blip in an otherwise solid return profile. FSE Services Group’s fundamentals can be explored with the links I’ve provided below if you are interested, otherwise you can start looking at other high-performing stocks.

1. Future Outlook: What are well-informed industry analysts predicting for 331’s future growth? Take a look at our free research report of analyst consensus for 331’s outlook.
2. Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for FSE Services Group’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.