Returns On Capital At Eco-Tek Holdings (HKG:8169) Have Stalled

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Eco-Tek Holdings (HKG:8169), it didn't seem to tick all of these boxes.

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 Eco-Tek Holdings is:

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

0.072 = HK$8.9m ÷ (HK$170m - HK$46m) (Based on the trailing twelve months to April 2024).

Therefore, Eco-Tek Holdings has an ROCE of 7.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.2%.

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

How Are Returns Trending?

Things have been pretty stable at Eco-Tek Holdings, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Eco-Tek Holdings doesn't end up being a multi-bagger in a few years time.

What We Can Learn From Eco-Tek Holdings' ROCE

We can conclude that in regards to Eco-Tek Holdings' returns on capital employed and the trends, there isn't much change to report on. And in the last five years, the stock has given away 67% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One more thing to note, we've identified 1 warning sign with Eco-Tek Holdings and understanding this should be part of your investment process.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.