Some Investors May Be Worried About Fu Shou Yuan International Group's (HKG:1448) Returns On Capital

Explore Fu Shou Yuan International Group's Fair Values from the Community and select yours

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. In light of that, when we looked at Fu Shou Yuan International Group (HKG:1448) and its ROCE trend, we weren't exactly thrilled.

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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. Analysts use this formula to calculate it for Fu Shou Yuan International Group:

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

0.12 = CN¥814m ÷ (CN¥8.2b - CN¥1.2b) (Based on the trailing twelve months to December 2024).

Thus, Fu Shou Yuan International Group has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Consumer Services industry average of 9.2% it's much better.

See our latest analysis for Fu Shou Yuan International Group

Above you can see how the current ROCE for Fu Shou Yuan International Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Fu Shou Yuan International Group for free.

How Are Returns Trending?

When we looked at the ROCE trend at Fu Shou Yuan International Group, we didn't gain much confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 12%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line On Fu Shou Yuan International Group's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Fu Shou Yuan International Group have fallen, meanwhile the business is employing more capital than it was five years ago. Investors haven't taken kindly to these developments, since the stock has declined 48% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know more about Fu Shou Yuan International Group, we've spotted 2 warning signs, and 1 of them can't be ignored.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.