Returns Are Gaining Momentum At Euro Tech Holdings (NASDAQ:CLWT)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. With that in mind, we've noticed some promising trends at Euro Tech Holdings (NASDAQ:CLWT) so let's look a bit deeper.

What Is 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 Euro Tech Holdings is:

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

0.053 = US$784k ÷ (US$21m - US$6.4m) (Based on the trailing twelve months to December 2021).

Thus, Euro Tech Holdings has an ROCE of 5.3%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 15%.

Check out our latest analysis for Euro Tech Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Euro Tech Holdings' ROCE against it's prior returns. If you'd like to look at how Euro Tech Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

We're delighted to see that Euro Tech Holdings is reaping rewards from its investments and has now broken into profitability. The company now earns 5.3% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Euro Tech Holdings has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

In Conclusion...

As discussed above, Euro Tech Holdings appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Euro Tech Holdings can keep these trends up, it could have a bright future ahead.

One more thing: We've identified 3 warning signs with Euro Tech Holdings (at least 1 which can't be ignored) , and understanding them would certainly be useful.

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. 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.