Here's What To Make Of Ever-Clear Environmental Eng's (GTSM:6624) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Ever-Clear Environmental Eng (GTSM:6624), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Ever-Clear Environmental Eng:

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

0.0075 = NT$3.8m ÷ (NT$708m - NT$197m) (Based on the trailing twelve months to September 2020).

Thus, Ever-Clear Environmental Eng has an ROCE of 0.7%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 5.0%.

See our latest analysis for Ever-Clear Environmental Eng

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

The Trend Of ROCE

When we looked at the ROCE trend at Ever-Clear Environmental Eng, we didn't gain much confidence. Around five years ago the returns on capital were 2.9%, but since then they've fallen to 0.7%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for Ever-Clear Environmental Eng have fallen, meanwhile the business is employing more capital than it was five years ago. Investors haven't taken kindly to these developments, since the stock has declined 38% from where it was three years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Ever-Clear Environmental Eng (of which 1 is a bit concerning!) that you should know about.

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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