Some Investors May Be Worried About Ruifeng Power Group's (HKG:2025) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Ruifeng Power Group (HKG:2025), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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. The formula for this calculation on Ruifeng Power Group is:

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

0.031 = CN¥31m ÷ (CN¥1.6b - CN¥579m) (Based on the trailing twelve months to December 2022).

Thus, Ruifeng Power Group has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 5.8%.

View our latest analysis for Ruifeng Power Group

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'd like to look at how Ruifeng Power Group 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

When we looked at the ROCE trend at Ruifeng Power Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.1% from 16% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From Ruifeng Power Group's ROCE

In summary, we're somewhat concerned by Ruifeng Power Group's diminishing returns on increasing amounts of capital. In spite of that, the stock has delivered a 8.7% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Ruifeng Power Group does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those can't be ignored...

While Ruifeng Power Group 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.