Slowing Rates Of Return At Green CrossLtd (FKSE:7533) Leave Little Room For Excitement

By
Simply Wall St
Published
March 31, 2021
FKSE:7533
Source: Shutterstock

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. That's why when we briefly looked at Green CrossLtd's (FKSE:7533) ROCE trend, we were pretty happy with what we saw.

What is 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 Green CrossLtd:

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

0.16 = JP¥1.4b ÷ (JP¥14b - JP¥5.1b) (Based on the trailing twelve months to January 2021).

Therefore, Green CrossLtd has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 6.3% generated by the Trade Distributors industry.

View our latest analysis for Green CrossLtd

roce
FKSE:7533 Return on Capital Employed March 31st 2021

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

What The Trend Of ROCE Can Tell Us

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 40% more capital in the last five years, and the returns on that capital have remained stable at 16%. 16% is a pretty standard return, and it provides some comfort knowing that Green CrossLtd has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

The Bottom Line

In the end, Green CrossLtd has proven its ability to adequately reinvest capital at good rates of return. And the stock has followed suit returning a meaningful 76% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

Like most companies, Green CrossLtd does come with some risks, and we've found 1 warning sign that you should be aware of.

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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