Investors Could Be Concerned With Furniweb Holdings' (HKG:8480) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 Furniweb Holdings (HKG:8480) 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 that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Furniweb Holdings is:

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

0.022 = RM2.7m ÷ (RM173m - RM53m) (Based on the trailing twelve months to December 2020).

So, Furniweb Holdings has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 7.4%.

Check out our latest analysis for Furniweb 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're interested in investigating Furniweb Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Furniweb Holdings Tell Us?

When we looked at the ROCE trend at Furniweb Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 6.8%, but since then they've fallen to 2.2%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

In Conclusion...

In summary, we're somewhat concerned by Furniweb Holdings' diminishing returns on increasing amounts of capital. Despite the concerning underlying trends, the stock has actually gained 13% over the last three years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you want to know some of the risks facing Furniweb Holdings we've found 2 warning signs (1 is potentially serious!) that you should be aware of before investing here.

While Furniweb Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. 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.
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