Investors Shouldn't Overlook The Favourable Returns On Capital At Green Future Food Hydrocolloid Marine Science (HKG:1084)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So, when we ran our eye over Green Future Food Hydrocolloid Marine Science's (HKG:1084) trend of ROCE, we really liked what we saw.

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 Green Future Food Hydrocolloid Marine Science is:

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

0.31 = HK$336m ÷ (HK$1.9b - HK$809m) (Based on the trailing twelve months to December 2022).

Therefore, Green Future Food Hydrocolloid Marine Science has an ROCE of 31%. That's a fantastic return and not only that, it outpaces the average of 9.3% earned by companies in a similar 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 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

We'd be pretty happy with returns on capital like Green Future Food Hydrocolloid Marine Science. Over the past five years, ROCE has remained relatively flat at around 31% and the business has deployed 132% more capital into its operations. Now considering ROCE is an attractive 31%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If Green Future Food Hydrocolloid Marine Science can keep this up, we'd be very optimistic about its future.

Another thing to note, Green Future Food Hydrocolloid Marine Science has a high ratio of current liabilities to total assets of 43%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. Yet over the last three years the stock has declined 19%, so the decline might provide an opening. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.

On a final note, we found 4 warning signs for Green Future Food Hydrocolloid Marine Science (1 shouldn't be ignored) you should be aware of.

Green Future Food Hydrocolloid Marine Science is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.