Fire Rock Holdings (HKG:1909) Knows How To Allocate Capital Effectively

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. And in light of that, the trends we're seeing at Fire Rock Holdings' (HKG:1909) look very promising so lets take a look.

Return On Capital Employed (ROCE): What is it?

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 Fire Rock Holdings is:

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

0.34 = HK$570m ÷ (HK$1.9b - HK$274m) (Based on the trailing twelve months to June 2021).

So, Fire Rock Holdings has an ROCE of 34%. In absolute terms that's a great return and it's even better than the Entertainment industry average of 11%.

View our latest analysis for Fire Rock Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Fire Rock Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Fire Rock Holdings, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

We like the trends that we're seeing from Fire Rock Holdings. The data shows that returns on capital have increased substantially over the last five years to 34%. The amount of capital employed has increased too, by 1,724%. So we're very much inspired by what we're seeing at Fire Rock Holdings thanks to its ability to profitably reinvest capital.

What We Can Learn From Fire Rock Holdings' ROCE

To sum it up, Fire Rock Holdings has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 2,354% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

Like most companies, Fire Rock Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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