Returns At Furniweb Holdings (HKG:8480) Are On The Way Up

Simply Wall St
March 18, 2022
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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Furniweb Holdings (HKG:8480) so let's look a bit deeper.

What is 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. The formula for this calculation on Furniweb Holdings is:

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

0.14 = RM18m ÷ (RM149m - RM22m) (Based on the trailing twelve months to September 2021).

Therefore, Furniweb Holdings has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 7.0% generated by the Luxury industry.

Check out our latest analysis for Furniweb Holdings

SEHK:8480 Return on Capital Employed March 18th 2022

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

So How Is Furniweb Holdings' ROCE Trending?

Furniweb Holdings is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 14%. Basically the business is earning more per dollar of capital invested and in addition to that, 49% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 14%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Furniweb Holdings has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From Furniweb Holdings' ROCE

In summary, it's great to see that Furniweb Holdings can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Although the company may be facing some issues elsewhere since the stock has plunged 93% in the last three years. Still, it's worth doing some further research to see if the trends will continue into the future.

If you'd like to know more about Furniweb Holdings, we've spotted 3 warning signs, and 1 of them is significant.

While Furniweb 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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