Today we are going to look at Casablanca Group Limited (HKG:2223) to see whether it might be an attractive investment prospect. 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 up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. 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 Casablanca Group:

0.064 = HK$27m ÷ (HK$516m - HK$91m) (Based on the trailing twelve months to June 2019.)

So, Casablanca Group has an ROCE of 6.4%.

Check out our latest analysis for Casablanca Group

Is Casablanca Group's ROCE Good?

One way to assess ROCE is to compare similar companies. In this analysis, Casablanca Group's ROCE appears meaningfully below the 10% average reported by the Consumer Durables industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Separate from how Casablanca Group stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.

We can see that, Casablanca Group currently has an ROCE of 6.4% compared to its ROCE 3 years ago, which was 3.5%. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how Casablanca Group's past growth compares to other companies.

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. 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, after all, simply a snap shot of a single year. How cyclical is Casablanca Group? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.