Golden Power Group Holdings (HKG:3919) Will Will Want To Turn Around Its Return Trends

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Golden Power Group Holdings (HKG:3919) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for Golden Power Group Holdings, this is the formula:

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

0.069 = HK$22m ÷ (HK$572m - HK$252m) (Based on the trailing twelve months to December 2020).

Thus, Golden Power Group Holdings has an ROCE of 6.9%. In absolute terms, that's a low return but it's around the Electrical industry average of 8.4%.

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.

What Does the ROCE Trend For Golden Power Group Holdings Tell Us?

In terms of Golden Power Group Holdings' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 15%, but since then they've fallen to 6.9%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Golden Power Group Holdings' current liabilities are still rather high at 44% 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Golden Power Group Holdings' ROCE

To conclude, we've found that Golden Power Group Holdings is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 37% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One more thing: We've identified 4 warning signs with Golden Power Group Holdings (at least 1 which is concerning) , and understanding them would certainly be useful.

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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