Green Future Food Hydrocolloid Marine Science (HKG:1084) Could Be Struggling To Allocate Capital

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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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.

What is Return On Capital Employed (ROCE)?

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 Green Future Food Hydrocolloid Marine Science is:

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

0.19 = HK$153m ÷ (HK$1.3b - HK$484m) (Based on the trailing twelve months to June 2020).

Thus, Green Future Food Hydrocolloid Marine Science has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 9.5% generated by the Chemicals industry.

Check out our latest analysis for Green Future Food Hydrocolloid Marine Science

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. 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 25% over the last three years. However it looks like Green Future Food Hydrocolloid Marine Science might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Green Future Food Hydrocolloid Marine Science has decreased its current liabilities to 38% of total assets. So we could link some of this to the decrease in ROCE. 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.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Green Future Food Hydrocolloid Marine Science's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 11% over the last year. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you want to know some of the risks facing Green Future Food Hydrocolloid Marine Science we've found 4 warning signs (1 can't be ignored!) that you should be aware of before investing here.

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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