We Like These Underlying Return On Capital Trends At Boer Power Holdings (HKG:1685)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. 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)?

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. 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)

0.093 = CN¥51m ÷ (CN¥1.4b - CN¥890m) (Based on the trailing twelve months to June 2023).

Therefore, Boer Power Holdings has an ROCE of 9.3%. In absolute terms, that's a low return, but it's much better than the Electrical industry average of 5.3%.

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

So How Is Boer Power Holdings' ROCE Trending?

We're delighted to see that Boer Power Holdings is reaping rewards from its investments and has now broken into profitability. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 9.3% on their capital employed. In regards to capital employed, Boer Power Holdings is using 45% 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. Boer Power Holdings could be selling under-performing assets since the ROCE is improving.

On a side note, Boer Power Holdings' current liabilities are still rather high at 62% 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 Key Takeaway

In a nutshell, we're pleased to see that Boer Power Holdings has been able to generate higher returns from less capital. Although the company may be facing some issues elsewhere since the stock has plunged 73% in the last five years. Still, it's worth doing some further research to see if the trends will continue into the future.

Boer Power Holdings does have some risks, we noticed 3 warning signs (and 2 which are concerning) we think you should 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.