Today we'll look at FIT Hon Teng Limited (HKG:6088) 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. Next, we'll compare it to others in its industry. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE measures the amount of pre-tax profits a company can generate from the 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.

So, How Do We Calculate ROCE?

Analysts use this formula to calculate return on capital employed:

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

Or for FIT Hon Teng:

0.099 = US$263m ÷ (US$4.3b - US$1.6b) (Based on the trailing twelve months to June 2019.)

So, FIT Hon Teng has an ROCE of 9.9%.

View our latest analysis for FIT Hon Teng

Is FIT Hon Teng's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, FIT Hon Teng's ROCE appears to be around the 9.9% average of the Electronic industry. Independently of how FIT Hon Teng compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

We can see that, FIT Hon Teng currently has an ROCE of 9.9%, less than the 14% it reported 3 years ago. This makes us wonder if the business is facing new challenges. You can click on the image below to see (in greater detail) how FIT Hon Teng's past growth compares to other companies.

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

What Are Current Liabilities, And How Do They Affect FIT Hon Teng's ROCE?

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.