Returns On Capital Are Showing Encouraging Signs At Chaowei Power Holdings (HKG:951)

If you're looking for a multi-bagger, there's a few things to keep an eye out 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Chaowei Power Holdings (HKG:951) and its trend of ROCE, we really liked what we saw.

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. To calculate this metric for Chaowei Power Holdings, this is the formula:

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

0.11 = CN¥947m ÷ (CN¥22b - CN¥14b) (Based on the trailing twelve months to June 2022).

So, Chaowei Power Holdings has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 4.2% generated by the Auto Components industry.

See our latest analysis for Chaowei Power Holdings

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

What Can We Tell From Chaowei Power Holdings' ROCE Trend?

The trends we've noticed at Chaowei Power Holdings are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 11%. Basically the business is earning more per dollar of capital invested and in addition to that, 28% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a separate but related note, it's important to know that Chaowei Power Holdings has a current liabilities to total assets ratio of 62%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Chaowei Power Holdings has. Given the stock has declined 47% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

Like most companies, Chaowei Power Holdings does come with some risks, and we've found 3 warning signs that you should be aware of.

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

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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.