Beware of VPower Group International Holdings (HKG: 1608) and its returns on capital

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If you are looking for a multi-bagger, there are a few things to look out for. Ideally, a business will display two trends; first growth to recover on capital employed (ROCE) and on the other hand, an increase amount capital employed. If you see this, it usually means it’s a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigation VPower Group International Holdings (HKG: 1608), we don’t think the current trends fit the mold of a multi-bagger.

Return on capital employed (ROCE): what is it?

Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. The formula for this calculation on VPower Group International Holdings is:

Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.048 = HK $ 303 million ÷ (HK $ 9.2 billion – HK $ 2.8 billion) (Based on the last twelve months up to June 2021).

Thereby, VPower Group International Holdings has a ROCE of 4.8%. Ultimately, this is low efficiency and it is 10% below the electrical industry average.

See our latest analysis for VPower Group International Holdings

SEHK: 1608 Return on capital employed September 27, 2021

In the chart above, we’ve measured VPower Group International Holdings’ past ROCE against its past performance, but arguably the future is more important. If you are interested, you can view analyst forecasts in our free analyst forecast report for the company.

The ROCE trend

In terms of the historic ROCE movements of VPower Group International Holdings, the trend is not great. About five years ago, returns on capital were 9.4%, but since then they have fallen to 4.8%. On the flip side, the company has used more capital without a corresponding improvement in sales over the past year, which might suggest that these investments are longer-term games. It’s worth keeping an eye on the company’s profits from now on to see if those investments end up contributing to the bottom line.

On a related note, VPower Group International Holdings reduced its current liabilities to 31% of total assets. So we could link some of that to the decrease in ROCE. In effect, this means that their suppliers or short-term creditors fund the business less, which reduces some elements of risk. Since the company essentially finances a larger portion of its operations with its own money, you could argue that this has made the company less efficient at generating ROCE.

The bottom line

To conclude, we have seen that VPower Group International Holdings is reinvesting in the business, but the returns are declining. And investors seem reluctant to see the trends accelerate as the stock has fallen 42% in the past three years. Either way, the stock lacks the characteristics of a multi-bagger discussed above, so if that’s what you’re looking for, we think you might have better luck elsewhere.

VPower Group International Holdings carries certain risks, we have noticed 2 warning signs (and 1 which doesn’t suit us very well) we think you should be aware of.

If you want to look for solid businesses with great income, check out this free list of companies with good balance sheets and impressive returns on equity.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.

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