Boer Power Holdings (HKG:1685) Is Looking To Continue Growing Its Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Boer Power Holdings' (HKG:1685) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

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 Boer Power Holdings, this is the formula:

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

0.063 = CN¥30m ÷ (CN¥1.4b - CN¥934m) (Based on the trailing twelve months to June 2022).

So, Boer Power Holdings has an ROCE of 6.3%. In absolute terms, that's a low return but it's around the Electrical industry average of 7.8%.

View our latest analysis for Boer Power Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Boer Power Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Boer Power Holdings Tell Us?

We're delighted to see that Boer Power Holdings is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but now it's turned around, earning 6.3% which is no doubt a relief for some early shareholders. Additionally, the business is utilizing 72% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. This could potentially mean that the company is selling some of its assets.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 66% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line On Boer Power Holdings' ROCE

From what we've seen above, Boer Power Holdings has managed to increase it's returns on capital all the while reducing it's capital base. And since the stock has dived 81% over the last five years, there may be other factors affecting the company's prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

One more thing to note, we've identified 3 warning signs with Boer Power Holdings and understanding them should be part of your investment process.

While Boer 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.