Returns Are Gaining Momentum At Founder Holdings (HKG:418)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Founder Holdings (HKG:418) so let's look a bit deeper.

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Return On Capital Employed (ROCE): What Is It?

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 Founder Holdings, this is the formula:

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

0.0085 = HK$9.9m ÷ (HK$1.4b - HK$284m) (Based on the trailing twelve months to December 2024).

So, Founder Holdings has an ROCE of 0.9%. Ultimately, that's a low return and it under-performs the Software industry average of 4.8%.

View our latest analysis for Founder Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Founder Holdings' ROCE against it's prior returns. If you're interested in investigating Founder Holdings' past further, check out this free graph covering Founder Holdings' past earnings, revenue and cash flow.

What Does the ROCE Trend For Founder Holdings Tell Us?

Shareholders will be relieved that Founder Holdings has broken into profitability. The company now earns 0.9% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

One more thing to note, Founder Holdings has decreased current liabilities to 20% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Key Takeaway

In summary, we're delighted to see that Founder Holdings has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a staggering 122% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Founder Holdings can keep these trends up, it could have a bright future ahead.

On a separate note, we've found 1 warning sign for Founder Holdings you'll probably want to know about.

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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.