Our Take On The Returns On Capital At Fairwood Holdings (HKG:52)

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Having said that, from a first glance at Fairwood Holdings (HKG:52) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. Analysts use this formula to calculate it for Fairwood Holdings:

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

0.091 = HK$151m ÷ (HK$2.6b - HK$915m) (Based on the trailing twelve months to September 2020).

Therefore, Fairwood Holdings has an ROCE of 9.1%. In absolute terms, that's a low return, but it's much better than the Hospitality industry average of 3.5%.

View our latest analysis for Fairwood Holdings

In the above chart we have measured Fairwood Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Fairwood Holdings.

What Does the ROCE Trend For Fairwood Holdings Tell Us?

When we looked at the ROCE trend at Fairwood Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 31%, but since then they've fallen to 9.1%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On Fairwood Holdings' ROCE

To conclude, we've found that Fairwood Holdings is reinvesting in the business, but returns have been falling. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a final note, we've found 3 warning signs for Fairwood Holdings that we think you should be aware of.

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. 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.
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