Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at FFI Holdings (ASX:FFI), it didn't seem to tick all of these boxes.

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What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for FFI Holdings:

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

0.081 = AU$4.3m ÷ (AU$67m - AU$14m) (Based on the trailing twelve months to December 2024).

Thus, FFI Holdings has an ROCE of 8.1%. Even though it's in line with the industry average of 7.6%, it's still a low return by itself.

See our latest analysis for FFI Holdings

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

How Are Returns Trending?

On the surface, the trend of ROCE at FFI Holdings doesn't inspire confidence. Over the last five years, returns on capital have decreased to 8.1% from 10% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

The Bottom Line

To conclude, we've found that FFI Holdings is reinvesting in the business, but returns have been falling. Unsurprisingly then, the total return to shareholders over the last five years has been flat. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One more thing: We've identified 4 warning signs with FFI Holdings (at least 2 which are concerning) , and understanding them would certainly be useful.

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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.