Returns On Capital At Far Eastern Department Stores (TWSE:2903) Have Hit The Brakes

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Far Eastern Department Stores (TWSE:2903), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Far Eastern Department Stores, this is the formula:

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

0.049 = NT$4.7b ÷ (NT$142b - NT$45b) (Based on the trailing twelve months to June 2024).

So, Far Eastern Department Stores has an ROCE of 4.9%. In absolute terms, that's a low return and it also under-performs the Multiline Retail industry average of 6.3%.

See our latest analysis for Far Eastern Department Stores

Historical performance is a great place to start when researching a stock so above you can see the gauge for Far Eastern Department Stores' ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Far Eastern Department Stores.

What Can We Tell From Far Eastern Department Stores' ROCE Trend?

In terms of Far Eastern Department Stores' historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 4.9% for the last five years, and the capital employed within the business has risen 25% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

In Conclusion...

As we've seen above, Far Eastern Department Stores' returns on capital haven't increased but it is reinvesting in the business. Unsurprisingly, the stock has only gained 40% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you'd like to know about the risks facing Far Eastern Department Stores, we've discovered 1 warning sign that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.