Stock Analysis

Returns Are Gaining Momentum At Hung Fook Tong Group Holdings (HKG:1446)

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What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 on that note, Hung Fook Tong Group Holdings (HKG:1446) looks quite promising in regards to its trends of return on capital.

What Is 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. Analysts use this formula to calculate it for Hung Fook Tong Group Holdings:

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

0.029 = HK$12m ÷ (HK$814m - HK$389m) (Based on the trailing twelve months to December 2021).

Thus, Hung Fook Tong Group Holdings has an ROCE of 2.9%. Ultimately, that's a low return and it under-performs the Beverage industry average of 10.0%.

Check out our latest analysis for Hung Fook Tong Group Holdings

SEHK:1446 Return on Capital Employed August 9th 2022

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 Hung Fook Tong Group Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Hung Fook Tong Group Holdings Tell Us?

The fact that Hung Fook Tong Group Holdings is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 2.9% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Hung Fook Tong Group Holdings is utilizing 39% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a side note, Hung Fook Tong Group Holdings' current liabilities are still rather high at 48% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

Long story short, we're delighted to see that Hung Fook Tong Group Holdings' reinvestment activities have paid off and the company is now profitable. And since the stock has fallen 47% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a final note, we've found 3 warning signs for Hung Fook Tong Group 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.

Valuation is complex, but we're helping make it simple.

Find out whether Hung Fook Tong Group Holdings is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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