China Ruifeng Renewable Energy Holdings (HKG:527) Could Be At Risk Of Shrinking As A Company

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. On that note, looking into China Ruifeng Renewable Energy Holdings (HKG:527), we weren't too upbeat about how things were going.

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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. To calculate this metric for China Ruifeng Renewable Energy Holdings, this is the formula:

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

0.016 = CN¥22m ÷ (CN¥2.5b - CN¥1.1b) (Based on the trailing twelve months to December 2024).

Therefore, China Ruifeng Renewable Energy Holdings has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 6.4%.

See our latest analysis for China Ruifeng Renewable Energy 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 China Ruifeng Renewable Energy Holdings has performed in the past in other metrics, you can view this free graph of China Ruifeng Renewable Energy Holdings' past earnings, revenue and cash flow.

What Can We Tell From China Ruifeng Renewable Energy Holdings' ROCE Trend?

We aren't too thrilled by the trend because ROCE has declined 59% over the last five years and despite the capital raising conducted before the latest reports, the business has -25% less capital employed.

On a side note, China Ruifeng Renewable Energy Holdings' current liabilities have increased over the last five years to 44% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Key Takeaway

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. It should come as no surprise then that the stock has fallen 46% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing, we've spotted 2 warning signs facing China Ruifeng Renewable Energy Holdings that you might find interesting.

While China Ruifeng Renewable Energy Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.