If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Fufeng Group (HKG:546) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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. The formula for this calculation on Fufeng Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.096 = CN¥1.4b ÷ (CN¥19b - CN¥5.0b) (Based on the trailing twelve months to June 2020).
Thus, Fufeng Group has an ROCE of 9.6%. On its own, that's a low figure but it's around the 11% average generated by the Chemicals industry.
See our latest analysis for Fufeng Group
In the above chart we have measured Fufeng Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Fufeng Group here for free.
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at Fufeng Group, we didn't gain much confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 9.6%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
On a related note, Fufeng Group has decreased its current liabilities to 26% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.Our Take On Fufeng Group's ROCE
While returns have fallen for Fufeng Group in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
Like most companies, Fufeng Group does come with some risks, and we've found 2 warning signs that you should be aware of.
While Fufeng Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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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About SEHK:546
Fufeng Group
An investment holding company, engages in the manufacture and sale of fermentation-based food additive, and biochemical and starch-based products in the People’s Republic of China and internationally.
Undervalued with excellent balance sheet and pays a dividend.
