We're Watching These Trends At Fufeng Group (HKG:546)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. In light of that, when we looked at Fufeng Group (HKG:546) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its 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).

Therefore, Fufeng Group has an ROCE of 9.6%. Even though it's in line with the industry average of 10%, it's still a low return by itself.

See our latest analysis for Fufeng Group

Above you can see how the current ROCE for Fufeng 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 Fufeng Group here for free.

What Can We Tell From Fufeng Group's ROCE Trend?

In terms of Fufeng Group's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 9.6% from 14% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. 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. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Fufeng Group is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 49% to shareholders over the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

One more thing to note, we've identified 3 warning signs with Fufeng Group and understanding them should be part of your investment process.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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