This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning the link between Future Data Group Limited (HKG:8229)’s return fundamentals and stock market performance.
Buying Future Data Group makes you a partial owner of the company. Your equity share is granted in return for the capital provided to the business to operate, and in order for an investment to be successful the business has to create earnings from the funds that make up this capital. This is because the actual cash flow generated by the business dictates the potential for income (dividends) and capital appreciation (price increases), which are the two ways to achieve positive returns when buying a stock. Therefore, looking at how efficiently Future Data Group is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.
Calculating Return On Capital Employed for 8229
You only have a finite amount of capital to invest, so there are only so many companies that you can add to your portfolio. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business’ ability to grow your capital at a level that grants an investment over other companies. We’ll look at Future Data Group’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. I have calculated Future Data Group’s ROCE for you below:
ROCE Calculation for 8229
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = HK$4.83m ÷ (HK$207.70m – HK$73.60m) = 3.60%
The calculation above shows that 8229’s earnings were 3.60% of capital employed. Comparing this to a healthy 15% benchmark shows Future Data Group is currently unable to return a satisfactory amount to owners for the use of their capital, which isn’t good for investors who have forgone other potentially solid companies.
What is causing this?
Future Data Group’s relatively poor ROCE is tied to the movement in two factors that change over time: earnings and capital requirements. At the moment Future Data Group is in an adverse position, but this can change if these factors improve. Therefore, investors need to understand the trend of the inputs in the formula above, so that they can see if there is an opportunity to invest. Looking at the past 3 year period shows us that 8229 weakened investor return on capital employed from 17.98%. Over the same period, EBT went from HK$12.87m to HK$4.83m and capital employed has increased due to a hike in the level of total assets and decrease in current liabilities (less borrowed money) , which means the company’s ROCE has shrunk as a result of falling earnings and simultaneous increases in capital requirements.
Future Data Group’s ROCE has decreased in the recent past and is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. However, it is important to know that ROCE does not dictate returns alone, so you need to consider other fundamentals in the business such as future prospects and management ability. If you’re building your portfolio and want to take a deeper look, I’ve added a few links below that will help you further evaluate 8229 or move on to other alternatives.
- Future Outlook: What are well-informed industry analysts predicting for 8229’s future growth? Take a look at our free research report of analyst consensus for 8229’s outlook.
- Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for Future Data Group’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.