Here’s What’s Happening With Returns At Eco-Tek Holdings (HKG:8169)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Eco-Tek Holdings (HKG:8169) looks quite promising in regards to its trends of return on capital.

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. Analysts use this formula to calculate it for Eco-Tek Holdings:

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

0.025 = HK$2.9m ÷ (HK$160m - HK$42m) (Based on the trailing twelve months to July 2020).

Therefore, Eco-Tek Holdings has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 9.9%.

View 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're interested in investigating Eco-Tek Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

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

Shareholders will be relieved that Eco-Tek Holdings has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 2.5% on its capital. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. 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.

The Bottom Line On Eco-Tek Holdings' ROCE

To bring it all together, Eco-Tek Holdings has done well to increase the returns it's generating from its capital employed. Astute investors may have an opportunity here because the stock has declined 64% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

If you want to continue researching Eco-Tek Holdings, you might be interested to know about the 1 warning sign that our analysis has discovered.

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. 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.
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