There Are Reasons To Feel Uneasy About Ruifeng Power Group's (HKG:2025) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Ruifeng Power Group (HKG:2025) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Ruifeng Power Group, this is the formula:

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

0.062 = CN¥65m ÷ (CN¥1.6b - CN¥524m) (Based on the trailing twelve months to June 2021).

Therefore, Ruifeng Power Group has an ROCE of 6.2%. Even though it's in line with the industry average of 6.2%, it's still a low return by itself.

View 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're interested in investigating Ruifeng Power Group's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Ruifeng Power Group's ROCE Trend?

On the surface, the trend of ROCE at Ruifeng Power Group doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.2% from 19% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Ruifeng Power Group is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 26% over the last three years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing: We've identified 3 warning signs with Ruifeng Power Group (at least 1 which is concerning) , and understanding these 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.