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Today we'll look at B & S International Holdings Ltd. (HKG:1705) and reflect on its potential as an investment. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

First, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'

How Do You Calculate Return On Capital Employed?

The formula for calculating the return on capital employed is:

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

Or for B & S International Holdings:

0.28 = HK$41m ÷ (HK$256m - HK$110m) (Based on the trailing twelve months to September 2018.)

So, B & S International Holdings has an ROCE of 28%.

View our latest analysis for B & S International Holdings

Is B & S International Holdings's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, B & S International Holdings's ROCE is meaningfully higher than the 11% average in the Consumer Retailing industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Setting aside the comparison to its industry for a moment, B & S International Holdings's ROCE in absolute terms currently looks quite high.

As we can see, B & S International Holdings currently has an ROCE of 28%, less than the 47% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds.

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. You can check if B & S International Holdings has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.