Should You Be Impressed By Green Future Food Hydrocolloid Marine Science's (HKG:1084) Returns on Capital?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. However, after briefly looking over the numbers, we don't think Green Future Food Hydrocolloid Marine Science (HKG:1084) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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).

So, 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 11% 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'd like to look at how Green Future Food Hydrocolloid Marine Science has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Green Future Food Hydrocolloid Marine Science's ROCE Trend?

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. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Green Future Food Hydrocolloid Marine Science has done well to pay down its current liabilities to 38% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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.

The Key Takeaway

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. Additionally, the stock's total return to shareholders over the last year has been flat, which isn't too surprising. Therefore based on the analysis done in this article, we don't think Green Future Food Hydrocolloid Marine Science has the makings of a multi-bagger.

If you'd like to know more about Green Future Food Hydrocolloid Marine Science, we've spotted 3 warning signs, and 1 of them can't be ignored.

While Green Future Food Hydrocolloid Marine Science may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. 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.
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