Future Data Group (HKG: 8229) may have difficulty using its capital efficiently
What trends should we look for if we are to identify stocks that can multiply in value over the long term? Among other things, we’ll want to see two things; first of all, a growth to recover on capital employed (ROCE) and on the other hand, an expansion of the amount capital employed. Basically, this means that a business has profitable initiatives that it can continue to reinvest in, which is a hallmark of a dialing machine. However, after briefly reviewing the numbers, we don’t think Future data group (HKG: 8229) has the makings of a multi-bagger in the future, but let’s see why this may be the case.
Return on capital employed (ROCE): what is it?
If you’ve never worked with ROCE before, it measures the âreturnâ (profit before tax) that a business generates on capital employed in its business. The formula for this calculation on Future Data Group is:
Return on capital employed = Profit before interest and taxes (EBIT) Ã· (Total assets – Current liabilities)
0.047 = HK $ 7.7million Ã· (HK $ 322million – HK $ 158million) (Based on the last twelve months up to September 2021).
Therefore, Future Data Group has a ROCE of 4.7%. At the end of the day, that’s a low return, and it’s below the IT industry average of 7.2%.
Check out our latest analysis for Future Data Group
Although the past is not representative of the future, it can be useful to know the historical performance of a company, which is why we have this graph above. If you want to dive into the history of Future Data Group earnings, revenue and cash flow, check out these free graphics here.
What does the ROCE trend tell us for the future dataset?
When we looked at the ROCE trend at Future Data Group, we didn’t gain much confidence. About five years ago, returns on capital were 14%, but since then they have fallen to 4.7%. Although, as income and the amount of assets used in the business have increased, this could suggest that the business is investing in growth and that the additional capital has resulted in a short-term reduction in ROCE. And if the capital increase generates additional returns, the company, and therefore shareholders, will benefit in the long run.
Another thing to note, Future Data Group has a high ratio of current liabilities to total assets of 49%. What this actually means is that suppliers (or short-term creditors) fund a large portion of the business, so just be aware that this can introduce some elements of risk. While this isn’t necessarily a bad thing, it can be beneficial if this ratio is lower.
Our opinion on the ROCE of the Future Data Group
In summary, despite lower returns in the short term, we are encouraged to see that Future Data Group is reinvesting for growth and therefore has higher sales. However, despite the promising trends, the stock has fallen 17% over the past five years, so there might be an opportunity here for astute investors. So we think it would be interesting to dig deeper into this title given that the trends seem encouraging.
If you would like to continue your research on Future Data Group, you may be interested in knowing the 2 warning signs that our analysis found.
While Future Data Group Doesn’t Achieve the Highest Return, Check Out This free list of companies that generate high returns on equity with strong balance sheets.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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