What Do The Returns On Capital At Ruifeng Power Group (HKG:2025) Tell Us?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Ruifeng Power Group (HKG:2025), 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. 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)

0.038 = CN¥39m ÷ (CN¥1.3b - CN¥314m) (Based on the trailing twelve months to June 2020).

Thus, Ruifeng Power Group has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 9.5%.

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?

In terms of Ruifeng Power Group's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 22% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, Ruifeng Power Group has decreased its current liabilities to 24% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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.

In Conclusion...

In summary, we're somewhat concerned by Ruifeng Power Group's diminishing returns on increasing amounts of capital. And, the stock has remained flat over the last three years, so investors don't seem too impressed either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Ruifeng Power Group does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

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. 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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