Returns On Capital Are A Standout For Green Economy Development (HKG:1315)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Green Economy Development's (HKG:1315) returns on capital, so let's have a look.

Understanding 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 Green Economy Development is:

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

0.20 = HK$46m ÷ (HK$895m - HK$669m) (Based on the trailing twelve months to September 2021).

So, Green Economy Development has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Construction industry average of 8.8%.

Check out our latest analysis for Green Economy Development

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

So How Is Green Economy Development's ROCE Trending?

Green Economy Development has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 10,565%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 55% less than it was five years ago, which can be indicative of a business that's improving its efficiency. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 75% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Key Takeaway

In summary, it's great to see that Green Economy Development has been able to turn things around and earn higher returns on lower amounts of capital. Although the company may be facing some issues elsewhere since the stock has plunged 98% in the last five years. Still, it's worth doing some further research to see if the trends will continue into the future.

One more thing, we've spotted 4 warning signs facing Green Economy Development that you might find interesting.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.