If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Fujikon Industrial Holdings (HKG:927) and its trend of ROCE, we really liked what we saw.
What is Return On Capital Employed (ROCE)?
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. To calculate this metric for Fujikon Industrial Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.013 = HK$9.3m ÷ (HK$1.0b - HK$296m) (Based on the trailing twelve months to September 2020).
Therefore, Fujikon Industrial Holdings has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 13%.
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, revenue and cash flow of Fujikon Industrial Holdings, check out these free graphs here.
What Does the ROCE Trend For Fujikon Industrial Holdings Tell Us?
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 463% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
The Key Takeaway
To sum it up, Fujikon Industrial Holdings is collecting higher returns from the same amount of capital, and that's impressive. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 13% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
Like most companies, Fujikon Industrial Holdings does come with some risks, and we've found 3 warning signs that you should be aware of.
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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Fujikon Industrial Holdings
Fujikon Industrial Holdings Limited, an investment holding company, designs, manufactures, markets, and trades in electro-acoustic products, accessories, and other electronic products in Hong Kong and China.
Flawless balance sheet and slightly overvalued.