These Return Metrics Don't Make Eco-Tek Holdings (HKG:8169) Look Too Strong

When researching a stock for investment, what can tell us that the company is in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. In light of that, from a first glance at Eco-Tek Holdings (HKG:8169), we've spotted some signs that it could be struggling, so let's investigate.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the 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)

0.047 = HK$5.8m ÷ (HK$172m - HK$50m) (Based on the trailing twelve months to January 2023).

Thus, Eco-Tek Holdings has an ROCE of 4.7%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 7.5%.

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.

How Are Returns Trending?

There is reason to be cautious about Eco-Tek Holdings, given the returns are trending downwards. To be more specific, the ROCE was 6.9% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 summary, it's unfortunate that Eco-Tek Holdings is generating lower returns from the same amount of capital. This could explain why the stock has sunk a total of 81% 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 a bit concerning!) that you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.