Golden Power Group Holdings (HKG:3919) May Have Issues Allocating Its Capital

What are the early trends we should look for to identify a stock that could 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. However, after briefly looking over the numbers, we don't think Golden Power Group Holdings (HKG:3919) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Golden Power Group Holdings is:

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

0.016 = HK$5.9m ÷ (HK$668m - HK$299m) (Based on the trailing twelve months to December 2021).

Thus, Golden Power Group Holdings has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 8.2%.

Check out our latest analysis for Golden Power Group Holdings

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

How Are Returns Trending?

When we looked at the ROCE trend at Golden Power Group Holdings, we didn't gain much confidence. To be more specific, ROCE has fallen from 19% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a separate but related note, it's important to know that Golden Power Group Holdings has a current liabilities to total assets ratio of 45%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

While returns have fallen for Golden Power Group Holdings in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. But since the stock has dived 83% in the last five years, there could be other drivers that are influencing the business' outlook. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

If you'd like to know more about Golden Power Group Holdings, we've spotted 4 warning signs, and 3 of them shouldn't be ignored.

While Golden Power Group 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.