Fu Yu (SGX:F13) Is Finding It Tricky To Allocate Its Capital

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. And from a first read, things don't look too good at Fu Yu (SGX:F13), so let's see why.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Fu Yu:

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

0.013 = S$2.0m ÷ (S$174m - S$28m) (Based on the trailing twelve months to December 2024).

Thus, Fu Yu has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 4.4%.

Check out our latest analysis for Fu Yu

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

What Does the ROCE Trend For Fu Yu Tell Us?

We are a bit worried about the trend of returns on capital at Fu Yu. About five years ago, returns on capital were 12%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Fu Yu to turn into a multi-bagger.

Our Take On Fu Yu's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Long term shareholders who've owned the stock over the last five years have experienced a 49% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Fu Yu (including 1 which is concerning) .

While Fu Yu 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.