We're Watching These Trends At Founder's Consultants Holdings (TYO:6542)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Although, when we looked at Founder's Consultants Holdings (TYO:6542), it didn't seem to tick all of these boxes.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Founder's Consultants Holdings is:

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

0.11 = JP¥769m ÷ (JP¥8.8b - JP¥1.9b) (Based on the trailing twelve months to September 2020).

Therefore, 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

Historical performance is a great place to start when researching a stock so above you can see the gauge for Founder's Consultants Holdings' ROCE against it's prior returns. If you'd like to look at how Founder's Consultants Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Founder's Consultants Holdings Tell Us?

When we looked at the ROCE trend at Founder's Consultants Holdings, we didn't gain much confidence. Around three years ago the returns on capital were 19%, 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Founder's Consultants Holdings has done well to pay down its current liabilities to 21% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

To conclude, we've found that Founder's Consultants Holdings is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 49% 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 3 warning signs in our investment analysis, and 1 of those is potentially serious...

While Founder's Consultants Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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