The Trends At Freetech Road Recycling Technology (Holdings) (HKG:6888) That You Should Know About

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Freetech Road Recycling Technology (Holdings) (HKG:6888), we don't think it's current trends fit the mold of a multi-bagger.

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)

0.042 = HK$29m ÷ (HK$1.0b - HK$326m) (Based on the trailing twelve months to June 2020).

So, Freetech Road Recycling Technology (Holdings) has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Infrastructure industry average of 5.5%.

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

We're a bit concerned with the trends, because the business is applying 42% less capital than it was five years ago and returns on that capital have stayed flat. To us that doesn't look like a multi-bagger because the company appears to be selling assets and it's returns aren't increasing. Not only that, but the low returns on this capital mentioned earlier would leave most investors unimpressed.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 32% of total assets, this reported ROCE would probably be less than4.2% because total capital employed would be higher.The 4.2% ROCE could be even lower if current liabilities weren't 32% of total assets, because the the formula would show a larger base of total capital employed. So while current liabilities isn't high right now, keep an eye out in case it increases further, because this can introduce some elements of risk.

In Conclusion...

Overall, we're not ecstatic to see Freetech Road Recycling Technology (Holdings) reducing the amount of capital it employs in the business. Moreover, since the stock has crumbled 86% over the last five years, it appears investors are expecting the worst. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One more thing to note, we've identified 1 warning sign with Freetech Road Recycling Technology (Holdings) and understanding this should be part of your investment process.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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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