Today we'll look at Asia Standard Hotel Group Limited (HKG:292) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting 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. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
So, How Do We Calculate ROCE?
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 Asia Standard Hotel Group:
0.067 = HK$628m ÷ (HK$11b - HK$1.7b) (Based on the trailing twelve months to September 2019.)
Therefore, Asia Standard Hotel Group has an ROCE of 6.7%.
Check out our latest analysis for Asia Standard Hotel Group
Does Asia Standard Hotel Group Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Asia Standard Hotel Group's ROCE is meaningfully higher than the 5.1% average in the Hospitality industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the industry comparison for now, Asia Standard Hotel Group's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
Our data shows that Asia Standard Hotel Group currently has an ROCE of 6.7%, compared to its ROCE of 4.5% 3 years ago. This makes us wonder if the company is improving. The image below shows how Asia Standard Hotel Group's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is only a point-in-time measure. You can check if Asia Standard Hotel Group has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.