There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Green Future Food Hydrocolloid Marine Science (HKG:1084), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Green Future Food Hydrocolloid Marine Science, this is the formula:

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

0.16 = HK$164m ÷ (HK$1.7b - HK$703m) (Based on the trailing twelve months to December 2021).

Therefore, Green Future Food Hydrocolloid Marine Science has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 12% it's much better.

Check out our latest analysis for Green Future Food Hydrocolloid Marine Science

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Green Future Food Hydrocolloid Marine Science's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Green Future Food Hydrocolloid Marine Science's ROCE Trend?

In terms of Green Future Food Hydrocolloid Marine Science's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 16% from 22% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Green Future Food Hydrocolloid Marine Science has decreased its current liabilities to 41% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 41% is still pretty high, so those risks are still somewhat prevalent.

Our Take On Green Future Food Hydrocolloid Marine Science's ROCE

While returns have fallen for Green Future Food Hydrocolloid Marine Science in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 272% to shareholders in the last year. So should these growth trends continue, we'd be optimistic on the stock going forward.

Green Future Food Hydrocolloid Marine Science does have some risks, we noticed 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

While Green Future Food Hydrocolloid Marine Science may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.