VPower Group International Holdings (HKG:1608) Has Some Difficulty Using Its Capital Effectively

When researching a stock for investment, what can tell us that the company is in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into VPower Group International Holdings (HKG:1608), the trends above didn't look too great.

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 VPower Group International Holdings, this is the formula:

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

0.055 = HK$179m ÷ (HK$8.9b - HK$5.6b) (Based on the trailing twelve months to December 2022).

So, VPower Group International Holdings has an ROCE of 5.5%. In absolute terms, that's a low return but it's around the Electrical industry average of 6.0%.

View our latest analysis for VPower Group International Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for VPower Group International Holdings' ROCE against it's prior returns. If you're interested in investigating VPower Group International Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is VPower Group International Holdings' ROCE Trending?

There is reason to be cautious about VPower Group International Holdings, given the returns are trending downwards. To be more specific, the ROCE was 9.1% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on VPower Group International Holdings becoming one if things continue as they have.

On a side note, VPower Group International Holdings' current liabilities have increased over the last five years to 63% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 5.5%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

The Key Takeaway

In summary, it's unfortunate that VPower Group International Holdings is generating lower returns from the same amount of capital. This could explain why the stock has sunk a total of 91% in the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing, we've spotted 2 warning signs facing VPower Group International Holdings that you might find interesting.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.