When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within Fu Burg Industrial (GTSM:8929), we weren't too hopeful.
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. The formula for this calculation on Fu Burg Industrial is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.034 = NT$38m ÷ (NT$1.5b - NT$374m) (Based on the trailing twelve months to December 2020).
Thus, Fu Burg Industrial has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Household Products industry average of 16%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Fu Burg Industrial's ROCE against it's prior returns. If you'd like to look at how Fu Burg Industrial has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
In terms of Fu Burg Industrial's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 6.8% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Fu Burg Industrial to turn into a multi-bagger.
What We Can Learn From Fu Burg Industrial's ROCE
In summary, it's unfortunate that Fu Burg Industrial is generating lower returns from the same amount of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 56% return over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Fu Burg Industrial (of which 1 is a bit concerning!) that you should know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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This article by Simply Wall St is general in nature. 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.
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