Will the Promising Trends At Chaowei Power Holdings (HKG:951) Continue?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Chaowei Power Holdings (HKG:951) so let's look a bit deeper.

Understanding 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. 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)

0.12 = CN¥891m ÷ (CN¥19b - CN¥12b) (Based on the trailing twelve months to June 2020).

Therefore, Chaowei Power Holdings has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 9.8% it's much better.

Check out our latest analysis for Chaowei Power Holdings

In the above chart we have measured Chaowei Power Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Chaowei Power Holdings here for free.

The Trend Of ROCE

Chaowei Power Holdings is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 12%. Basically the business is earning more per dollar of capital invested and in addition to that, 53% more capital is being employed now too. So we're very much inspired by what we're seeing at Chaowei Power Holdings thanks to its ability to profitably reinvest capital.

Another thing to note, Chaowei Power Holdings has a high ratio of current liabilities to total assets of 62%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Chaowei Power Holdings' ROCE

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 39% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One final note, you should learn about the 4 warning signs we've spotted with Chaowei Power Holdings (including 1 which is is a bit unpleasant) .

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. 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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