Investors Shouldn't Overlook Fulum Group Holdings' (HKG:1443) Impressive Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of Fulum Group Holdings (HKG:1443) we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Fulum Group Holdings, this is the formula:

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

0.43 = HK$151m ÷ (HK$991m - HK$643m) (Based on the trailing twelve months to March 2023).

Thus, Fulum Group Holdings has an ROCE of 43%. In absolute terms that's a great return and it's even better than the Hospitality industry average of 4.4%.

View our latest analysis for Fulum Group Holdings

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

What Can We Tell From Fulum Group Holdings' ROCE Trend?

We're pretty happy with how the ROCE has been trending at Fulum Group Holdings. We found that the returns on capital employed over the last five years have risen by 708%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Speaking of capital employed, the company is actually utilizing 68% less than it was five years ago, which can be indicative of a business that's improving its efficiency. Fulum Group Holdings may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 65% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

In Conclusion...

From what we've seen above, Fulum Group Holdings has managed to increase it's returns on capital all the while reducing it's capital base. And since the stock has fallen 56% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

If you want to continue researching Fulum Group Holdings, you might be interested to know about the 3 warning signs that our analysis has discovered.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.