Here's What's Concerning About Green Future Food Hydrocolloid Marine Science's (HKG:1084) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. In light of that, when we looked at Green Future Food Hydrocolloid Marine Science (HKG:1084) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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. 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)

0.16 = 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%. On its own, that's a standard return, however it's much better than the 12% generated by the Chemicals industry.

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're interested in investigating Green Future Food Hydrocolloid Marine Science's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Green Future Food Hydrocolloid Marine Science Tell Us?

On the surface, the trend of ROCE at Green Future Food Hydrocolloid Marine Science doesn't inspire confidence. To be more specific, ROCE has fallen from 22% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Green Future Food Hydrocolloid Marine Science has decreased its current liabilities to 41% 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. Keep in mind 41% is still pretty high, so those risks are still somewhat prevalent.

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

While returns have fallen for Green Future Food Hydrocolloid Marine Science in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has done incredibly well with a 215% return over the last year, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

Green Future Food Hydrocolloid Marine Science does have some risks, we noticed 3 warning signs (and 1 which is a bit concerning) we think you should know about.

While Green Future Food Hydrocolloid Marine Science 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. 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.