Will VPower Group International Holdings (HKG:1608) Multiply In Value Going Forward?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at VPower Group International Holdings (HKG:1608), it didn't seem to tick all of these boxes.

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 VPower Group International Holdings, this is the formula:

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

0.072 = HK$398m ÷ (HK$9.0b - HK$3.4b) (Based on the trailing twelve months to June 2020).

Thus, VPower Group International Holdings has an ROCE of 7.2%. In absolute terms, that's a low return but it's around the Electrical industry average of 8.7%.

Check out our latest analysis for VPower Group International Holdings

Above you can see how the current ROCE for VPower Group International Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for VPower Group International Holdings.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at VPower Group International Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 7.2%. 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.

On a related note, VPower Group International Holdings has decreased its current liabilities to 38% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On VPower Group International Holdings' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that VPower Group International Holdings is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 51% 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.

VPower Group International Holdings does have some risks, we noticed 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

While VPower Group International Holdings 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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