Investors Could Be Concerned With Fountain Set (Holdings)'s (HKG:420) Returns On Capital

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at Fountain Set (Holdings) (HKG:420), we've spotted some signs that it could be struggling, so let's investigate.

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Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Fountain Set (Holdings):

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

0.021 = HK$75m ÷ (HK$4.6b - HK$973m) (Based on the trailing twelve months to December 2024).

Therefore, Fountain Set (Holdings) has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 12%.

See our latest analysis for Fountain Set (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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Fountain Set (Holdings).

What Does the ROCE Trend For Fountain Set (Holdings) Tell Us?

We are a bit worried about the trend of returns on capital at Fountain Set (Holdings). To be more specific, the ROCE was 6.5% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Fountain Set (Holdings) becoming one if things continue as they have.

The Bottom Line

In summary, it's unfortunate that Fountain Set (Holdings) is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 0.3% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Fountain Set (Holdings) (of which 1 is potentially serious!) that you should know about.

While Fountain Set (Holdings) may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.