The Returns On Capital At Founder's Consultants Holdings (TYO:6542) Don't Inspire Confidence

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Founder's Consultants Holdings (TYO:6542), it didn't seem to tick all of these boxes.

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 Founder's Consultants Holdings, this is the formula:

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

0.11 = JP¥728m ÷ (JP¥9.7b - JP¥3.2b) (Based on the trailing twelve months to December 2020).

So, Founder's Consultants Holdings has an ROCE of 11%. In isolation, that's a pretty standard return but against the Professional Services industry average of 17%, it's not as good.

See our latest analysis for Founder's Consultants 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 want to delve into the historical earnings, revenue and cash flow of Founder's Consultants Holdings, check out these free graphs here.

The Trend Of ROCE

In terms of Founder's Consultants Holdings' historical ROCE movements, the trend isn't fantastic. Around three years ago the returns on capital were 20%, but since then they've fallen to 11%. However it looks like Founder's Consultants Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

In summary, Founder's Consultants Holdings is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 42% over the last three years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Founder's Consultants Holdings does come with some risks though, we found 6 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

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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