Freetech Road Recycling Technology (Holdings)'s (HKG:6888) Returns On Capital Are Heading Higher

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Freetech Road Recycling Technology (Holdings) (HKG:6888) looks quite promising in regards to its trends of return on capital.

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. Analysts use this formula to calculate it for Freetech Road Recycling Technology (Holdings):

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

0.083 = HK$71m ÷ (HK$1.2b - HK$338m) (Based on the trailing twelve months to June 2021).

Thus, Freetech Road Recycling Technology (Holdings) has an ROCE of 8.3%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.3%.

See our latest analysis for Freetech Road Recycling Technology (Holdings)

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're interested in investigating Freetech Road Recycling Technology (Holdings)'s past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Freetech Road Recycling Technology (Holdings)'s ROCE Trend?

We're pretty happy with how the ROCE has been trending at Freetech Road Recycling Technology (Holdings). The data shows that returns on capital have increased by 20% over the trailing five years. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 31% less than it was five years ago, which can be indicative of a business that's improving its efficiency. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

Our Take On Freetech Road Recycling Technology (Holdings)'s ROCE

In summary, it's great to see that Freetech Road Recycling Technology (Holdings) has been able to turn things around and earn higher returns on lower amounts of capital. And since the stock has dived 73% over the last five years, there may be other factors affecting the company's prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

One more thing, we've spotted 2 warning signs facing Freetech Road Recycling Technology (Holdings) that you might find interesting.

While Freetech Road Recycling Technology (Holdings) 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.