Boer Power Holdings (HKG:1685) Will Be Looking To Turn Around Its Returns

What underlying fundamental trends can indicate that a company might be in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at Boer Power Holdings (HKG:1685), we've spotted some signs that it could be struggling, so let's investigate.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Boer Power Holdings:

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

0.11 = CN¥76m ÷ (CN¥1.5b - CN¥781m) (Based on the trailing twelve months to December 2020).

So, Boer Power Holdings has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 8.2% generated by the Electrical industry.

See our latest analysis for Boer Power Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Boer Power Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Boer Power Holdings, check out these free graphs here.

The Trend Of ROCE

The trend of returns that Boer Power Holdings is generating are raising some concerns. To be more specific, today's ROCE was 30% five years ago but has since fallen to 11%. In addition to that, Boer Power Holdings is now employing 69% less capital than it was five years ago. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

Another thing to note, Boer Power Holdings has a high ratio of current liabilities to total assets of 53%. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Boer Power Holdings' ROCE

In summary, it's unfortunate that Boer Power Holdings is shrinking its capital base and also generating lower returns. We expect this has contributed to the stock plummeting 84% during the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Boer Power Holdings (including 1 which is a bit concerning) .

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. 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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