Be Wary Of Green Future Food Hydrocolloid Marine Science (HKG:1084) And Its Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Having said that, from a first glance at Green Future Food Hydrocolloid Marine Science (HKG:1084) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Green Future Food Hydrocolloid Marine Science, this is the formula:

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

0.16 = HK$164m ÷ (HK$1.7b - HK$703m) (Based on the trailing twelve months to December 2021).

So, Green Future Food Hydrocolloid Marine Science has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 12% it's much better.

See our latest analysis for Green Future Food Hydrocolloid Marine Science

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

What The Trend Of ROCE Can Tell Us

In terms of Green Future Food Hydrocolloid Marine Science's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 22% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Green Future Food Hydrocolloid Marine Science has done well to pay down its current liabilities to 41% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

The Bottom Line On Green Future Food Hydrocolloid Marine Science's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Green Future Food Hydrocolloid Marine Science. And the stock has done incredibly well with a 210% return over the last year, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

One more thing: We've identified 3 warning signs with Green Future Food Hydrocolloid Marine Science (at least 2 which are potentially serious) , and understanding them would certainly be useful.

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.