Stock Analysis

Returns At Freetech Road Recycling Technology (Holdings) (HKG:6888) Are On The Way Up

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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. With that in mind, we've noticed some promising trends at Freetech Road Recycling Technology (Holdings) (HKG:6888) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Freetech Road Recycling Technology (Holdings), this is the formula:

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

0.049 = HK$41m ÷ (HK$1.3b - HK$467m) (Based on the trailing twelve months to June 2022).

So, Freetech Road Recycling Technology (Holdings) has an ROCE of 4.9%. On its own, that's a low figure but it's around the 5.7% average generated by the Infrastructure industry.

Check out our latest analysis for Freetech Road Recycling Technology (Holdings)

SEHK:6888 Return on Capital Employed September 2nd 2022

Historical performance is a great place to start when researching a stock so above you can see the gauge for Freetech Road Recycling Technology (Holdings)'s ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Freetech Road Recycling Technology (Holdings), check out these free graphs here.

So How Is Freetech Road Recycling Technology (Holdings)'s ROCE Trending?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. We found that the returns on capital employed over the last five years have risen by 167%. The company is now earning HK$0.05 per dollar of capital employed. In regards to capital employed, Freetech Road Recycling Technology (Holdings) appears to been achieving more with less, since the business is using 33% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 36% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

What We Can Learn From Freetech Road Recycling Technology (Holdings)'s ROCE

In the end, Freetech Road Recycling Technology (Holdings) has proven it's capital allocation skills are good with those higher returns from less amount of capital. Given the stock has declined 70% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

Freetech Road Recycling Technology (Holdings) does have some risks though, and we've spotted 3 warning signs for Freetech Road Recycling Technology (Holdings) that you might be interested in.

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.

Valuation is complex, but we're helping make it simple.

Find out whether Freetech Road Recycling Technology (Holdings) is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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About SEHK:6888

Freetech Road Recycling Technology (Holdings)

Freetech Road Recycling Technology (Holdings) Limited, an investment holding company, manufactures and sells road maintenance equipment in the People’s Republic of China.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Future Growth0
Past Performance2
Financial Health5

Read more about these checks in the individual report sections or in our analysis model.

Excellent balance sheet with questionable track record.