Eco-Tek Holdings (HKG:8169) May Have Issues Allocating Its Capital

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. And from a first read, things don't look too good at Eco-Tek Holdings (HKG:8169), so let's see why.

What Is 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. To calculate this metric for Eco-Tek Holdings, this is the formula:

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

0.039 = HK$5.2m ÷ (HK$173m - HK$39m) (Based on the trailing twelve months to July 2023).

Thus, Eco-Tek Holdings has an ROCE of 3.9%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 8.2%.

See our latest analysis for Eco-Tek Holdings

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

What Can We Tell From Eco-Tek Holdings' ROCE Trend?

There is reason to be cautious about Eco-Tek Holdings, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 7.0% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Eco-Tek Holdings becoming one if things continue as they have.

The Bottom Line On Eco-Tek Holdings' ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. This could explain why the stock has sunk a total of 74% in the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Eco-Tek Holdings (of which 1 is potentially serious!) that you should know about.

While Eco-Tek Holdings 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.