Returns On Capital Signal Difficult Times Ahead For Freetech Road Recycling Technology (Holdings) (HKG:6888)

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at Freetech Road Recycling Technology (Holdings) (HKG:6888), so let's see why.

Understanding 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 Freetech Road Recycling Technology (Holdings) is:

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

0.023 = HK$19m ÷ (HK$1.3b - HK$500m) (Based on the trailing twelve months to December 2020).

Thus, Freetech Road Recycling Technology (Holdings) has an ROCE of 2.3%. In absolute terms, that's a low return and it also under-performs the Infrastructure industry average of 6.3%.

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

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.

What Does the ROCE Trend For Freetech Road Recycling Technology (Holdings) Tell Us?

The trend of returns that Freetech Road Recycling Technology (Holdings) is generating are raising some concerns. To be more specific, today's ROCE was 5.2% five years ago but has since fallen to 2.3%. In addition to that, Freetech Road Recycling Technology (Holdings) is now employing 33% less capital than it was five years ago. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. If these underlying trends continue, we wouldn't be too optimistic going forward.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 37%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

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

To see Freetech Road Recycling Technology (Holdings) reducing the capital employed in the business in tandem with diminishing returns, is concerning. It should come as no surprise then that the stock has fallen 63% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a separate note, we've found 3 warning signs for Freetech Road Recycling Technology (Holdings) you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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