Here's What To Make Of United Strength Power Holdings' (HKG:2337) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Having said that, from a first glance at United Strength Power Holdings (HKG:2337) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper 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. Analysts use this formula to calculate it for United Strength Power Holdings:

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

0.16 = CN¥47m ÷ (CN¥425m - CN¥125m) (Based on the trailing twelve months to June 2020).

Thus, United Strength Power Holdings has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Specialty Retail industry average of 11% it's much better.

View our latest analysis for United Strength 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 want to delve into the historical earnings, revenue and cash flow of United Strength Power Holdings, check out these free graphs here.

How Are Returns Trending?

In terms of United Strength Power Holdings' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 16% from 27% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

In Conclusion...

We're a bit apprehensive about United Strength Power Holdings because despite more capital being deployed in the business, returns on that capital and sales have both fallen. But investors must be expecting an improvement of sorts because over the last three yearsthe stock has delivered a respectable 78% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you'd like to know more about United Strength Power Holdings, we've spotted 3 warning signs, and 1 of them makes us a bit uncomfortable.

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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