There's Been No Shortage Of Growth Recently For Boer Power Holdings' (HKG:1685) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Boer Power Holdings' (HKG:1685) returns on capital, so let's have a look.

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

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

0.099 = CN¥46m ÷ (CN¥1.5b - CN¥1.0b) (Based on the trailing twelve months to December 2023).

Thus, Boer Power Holdings has an ROCE of 9.9%. In absolute terms, that's a low return, but it's much better than the Electrical industry average of 7.0%.

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'd like to look at how Boer Power Holdings has performed in the past in other metrics, you can view this free graph of Boer Power Holdings' past earnings, revenue and cash flow.

So How Is Boer Power Holdings' ROCE 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 9.9% which is no doubt a relief for some early shareholders. In regards to capital employed, Boer Power Holdings is using 33% 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, Boer Power Holdings' current liabilities are still rather high at 69% of total assets. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Boer Power Holdings' ROCE

In summary, it's great to see that Boer Power Holdings has been able to turn things around and earn higher returns on lower amounts of capital. Given the stock has declined 61% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

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

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com