Why The 41% Return On Capital At Fulum Group Holdings (HKG:1443) Should Have Your Attention

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at the ROCE trend of Fulum Group Holdings (HKG:1443) we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)

0.41 = HK$206m ÷ (HK$1.3b - HK$760m) (Based on the trailing twelve months to September 2023).

So, Fulum Group Holdings has an ROCE of 41%. In absolute terms that's a great return and it's even better than the Hospitality industry average of 6.0%.

Check out 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 covering Fulum Group Holdings' past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We're pretty happy with how the ROCE has been trending at Fulum Group Holdings. The figures show that over the last five years, returns on capital have grown by 623%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, Fulum Group Holdings appears to been achieving more with less, since the business is using 50% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

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 60% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

The Bottom Line On Fulum Group Holdings' ROCE

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. Given the stock has declined 57% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a separate note, we've found 3 warning signs for Fulum Group Holdings you'll probably want to know about.

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.