Investors Will Want Fulum Group Holdings' (HKG:1443) Growth In ROCE To Persist

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Fulum Group Holdings (HKG:1443) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

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 Fulum Group Holdings:

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

0.18 = HK$55m ÷ (HK$996m - HK$684m) (Based on the trailing twelve months to March 2022).

Therefore, Fulum Group Holdings has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Hospitality industry average of 2.9% it's much better.

View our latest analysis for Fulum Group 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 Fulum Group Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Fulum Group Holdings has not disappointed in regards to ROCE growth. The data shows that returns on capital have increased by 69% over the trailing five years. The company is now earning HK$0.2 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 71% 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.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 69% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

The Bottom Line

In summary, it's great to see that Fulum Group Holdings has been able to turn things around and earn higher returns on lower amounts of capital. And since the stock has dived 74% over the last five years, there may be other factors affecting the company's prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

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

While Fulum Group 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. 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.