Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at FIT Hon Teng (HKG:6088), it didn't seem to tick all of these boxes.

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

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 FIT Hon Teng, this is the formula:

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

0.041 = US$127m ÷ (US$5.0b - US$1.9b) (Based on the trailing twelve months to December 2021).

So, FIT Hon Teng has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 6.3%.

Check out our latest analysis for FIT Hon Teng

Above you can see how the current ROCE for FIT Hon Teng compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering FIT Hon Teng here for free.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at FIT Hon Teng, we didn't gain much confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 4.1%. However it looks like FIT Hon Teng 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, FIT Hon Teng has done well to pay down its current liabilities to 39% of total assets. That could partly explain why the ROCE has dropped. 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On FIT Hon Teng's ROCE

To conclude, we've found that FIT Hon Teng is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 67% in the last five years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a final note, we've found 3 warning signs for FIT Hon Teng that we think you should be aware of.

While FIT Hon Teng 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.