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.
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.
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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.
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 Area||Score (0-6)|
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Excellent balance sheet with questionable track record.