In This Article:
Today we'll evaluate CircuTech International Holdings Limited (HKG:8051) to determine whether it could have potential as an investment idea. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
Understanding Return On Capital Employed (ROCE)
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. 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 CircuTech International Holdings:
0.016 = HK$2.2m ÷ (HK$151m - HK$17m) (Based on the trailing twelve months to December 2019.)
Therefore, CircuTech International Holdings has an ROCE of 1.6%.
View our latest analysis for CircuTech International Holdings
Is CircuTech International Holdings's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. In this analysis, CircuTech International Holdings's ROCE appears meaningfully below the 9.8% average reported by the Electronic industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Putting aside CircuTech International Holdings's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. There are potentially more appealing investments elsewhere.
CircuTech International Holdings has an ROCE of 1.6%, but it didn't have an ROCE 3 years ago, since it was unprofitable. This makes us wonder if the company is improving. You can see in the image below how CircuTech International Holdings's ROCE compares to its industry. Click to see more on past growth.
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. ROCE is, after all, simply a snap shot of a single year. How cyclical is CircuTech International Holdings? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.