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. Although, when we looked at ReTo Eco-Solutions (NASDAQ:RETO), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on ReTo Eco-Solutions is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.022 = US$1.3m ÷ (US$83m - US$25m) (Based on the trailing twelve months to June 2019).
Thus, ReTo Eco-Solutions has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 9.3%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for ReTo Eco-Solutions' ROCE against it's prior returns. If you're interested in investigating ReTo Eco-Solutions' past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
In terms of ReTo Eco-Solutions' historical ROCE movements, the trend isn't fantastic. Around four years ago the returns on capital were 9.2%, but since then they've fallen to 2.2%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.On a related note, ReTo Eco-Solutions has decreased its current liabilities to 30% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
The Bottom Line
To conclude, we've found that ReTo Eco-Solutions is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 53% in the last year. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
If you'd like to know more about ReTo Eco-Solutions, we've spotted 4 warning signs, and 1 of them is a bit concerning.
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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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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