Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Hung Fook Tong Group Holdings (HKG:1446) so let's look a bit deeper.
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. The formula for this calculation on Hung Fook Tong Group Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.081 = HK$34m ÷ (HK$789m - HK$372m) (Based on the trailing twelve months to June 2020).
So, Hung Fook Tong Group Holdings has an ROCE of 8.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.2%.
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 want to delve into the historical earnings, revenue and cash flow of Hung Fook Tong Group Holdings, check out these free graphs here.
What Does the ROCE Trend For Hung Fook Tong Group Holdings Tell Us?
We're delighted to see that Hung Fook Tong Group Holdings is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 8.1% on its capital. In addition to that, Hung Fook Tong Group Holdings is employing 52% more capital than previously which is expected of a company that's trying to break into profitability. 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.Another thing to note, Hung Fook Tong Group Holdings has a high ratio of current liabilities to total assets of 47%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
What We Can Learn From Hung Fook Tong Group Holdings' ROCE
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. Given the stock has declined 21% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
On a separate note, we've found 3 warning signs for Hung Fook Tong Group Holdings you'll probably want to know about.
While Hung Fook Tong Group Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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Hung Fook Tong Group Holdings
Hung Fook Tong Group Holdings Limited, an investment holding company, produces, retails, wholesales, and distributes bottled drinks and other herbal products in the People’s Republic of China, Hong Kong, and internationally.
Good value with adequate balance sheet.