Boer Power Holdings' (HKG:1685) Returns On Capital Are Heading Higher

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. With that in mind, we've noticed some promising trends at Boer Power Holdings (HKG:1685) so let's look a bit deeper.

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. The formula for this calculation on Boer Power Holdings is:

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).

Thus, Boer Power Holdings has an ROCE of 6.3%. Even though it's in line with the industry average of 6.2%, it's still a low return by itself.

See 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.

How Are Returns Trending?

It's great to see that Boer Power Holdings has started to generate some pre-tax earnings from prior investments. 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. In regards to capital employed, Boer Power Holdings is using 72% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. This could potentially mean that the company is selling some of its assets.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 66% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

In Conclusion...

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 88% over the last five years, there may be other factors affecting the company's prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

On a separate note, we've found 2 warning signs for Boer Power Holdings you'll probably want to know about.

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.