Eco-Tek Holdings' (HKG:8169) Returns On Capital Are Heading Higher

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Eco-Tek Holdings' (HKG:8169) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Eco-Tek Holdings is:

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

0.079 = HK$9.9m ÷ (HK$197m - HK$71m) (Based on the trailing twelve months to January 2022).

Therefore, Eco-Tek Holdings has an ROCE of 7.9%. Even though it's in line with the industry average of 8.1%, it's still a low return by itself.

Check out 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.

So How Is Eco-Tek Holdings' ROCE Trending?

We're delighted to see that Eco-Tek Holdings is reaping rewards from its investments and has now broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 7.9% on its capital. While returns have increased, the amount of capital employed by Eco-Tek Holdings has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 36% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

Our Take On Eco-Tek Holdings' ROCE

In summary, we're delighted to see that Eco-Tek Holdings has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And since the stock has dived 75% over the last five years, there may be other factors affecting the company's prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

On a final note, we found 2 warning signs for Eco-Tek Holdings (1 makes us a bit uncomfortable) you should be aware of.

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.