Slowing Rates Of Return At Forward Fashion (International) Holdings (HKG:2528) Leave Little Room For Excitement

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Forward Fashion (International) Holdings (HKG:2528), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Forward Fashion (International) Holdings, this is the formula:

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

0.081 = HK$39m ÷ (HK$1.1b - HK$642m) (Based on the trailing twelve months to December 2021).

So, Forward Fashion (International) Holdings has an ROCE of 8.1%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 11%.

View our latest analysis for Forward Fashion (International) Holdings

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 Forward Fashion (International) Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Forward Fashion (International) Holdings' ROCE Trending?

Over the past five years, Forward Fashion (International) Holdings' ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at Forward Fashion (International) Holdings in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

On a side note, Forward Fashion (International) Holdings' current liabilities are still rather high at 57% 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.

Our Take On Forward Fashion (International) Holdings' ROCE

In a nutshell, Forward Fashion (International) Holdings has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has declined 60% over the last year, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Like most companies, Forward Fashion (International) Holdings does come with some risks, and we've found 2 warning signs that you should be aware of.

While Forward Fashion (International) Holdings 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. 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.