Capital Allocation Trends At Ruifeng Power Group (HKG:2025) Aren't Ideal

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. In light of that, from a first glance at Ruifeng Power Group (HKG:2025), we've spotted some signs that it could be struggling, so let's investigate.

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

Return On Capital Employed (ROCE): What Is It?

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 Ruifeng Power Group is:

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

0.027 = CN¥32m ÷ (CN¥1.8b - CN¥637m) (Based on the trailing twelve months to June 2025).

So, Ruifeng Power Group has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 4.0%.

Check out our latest analysis for Ruifeng Power Group

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

How Are Returns Trending?

There is reason to be cautious about Ruifeng Power Group, given the returns are trending downwards. To be more specific, the ROCE was 3.8% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Ruifeng Power Group to turn into a multi-bagger.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 35%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 2.7%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

Our Take On Ruifeng Power Group's ROCE

In summary, it's unfortunate that Ruifeng Power Group is generating lower returns from the same amount of capital. Since the stock has skyrocketed 741% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you'd like to know more about Ruifeng Power Group, we've spotted 2 warning signs, and 1 of them shouldn't be ignored.

While Ruifeng Power Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.