We Like These Underlying Return On Capital Trends At Ecosuntek (BIT:ECK)

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Ecosuntek (BIT:ECK) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Ecosuntek:

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

0.082 = €2.3m ÷ (€105m - €78m) (Based on the trailing twelve months to December 2021).

Thus, Ecosuntek has an ROCE of 8.2%. In absolute terms, that's a low return but it's around the Renewable Energy industry average of 6.9%.

Check out our latest analysis for Ecosuntek

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

What Does the ROCE Trend For Ecosuntek Tell Us?

We're pretty happy with how the ROCE has been trending at Ecosuntek. The data shows that returns on capital have increased by 140% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. 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. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

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 74% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

In Conclusion...

From what we've seen above, Ecosuntek has managed to increase it's returns on capital all the while reducing it's capital base. Since the stock has only returned 35% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

Ecosuntek does have some risks, we noticed 3 warning signs (and 2 which are potentially serious) we think you should know about.

While Ecosuntek 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.