Today we are going to look at Citychamp Watch & Jewellery Group Limited (HKG:256) 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. Then we'll determine how its current liabilities are affecting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. 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?

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 Citychamp Watch & Jewellery Group:

0.021 = HK$369m ÷ (HK$20b - HK$2.3b) (Based on the trailing twelve months to December 2018.)

Therefore, Citychamp Watch & Jewellery Group has an ROCE of 2.1%.

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Check out our latest analysis for Citychamp Watch & Jewellery Group

Does Citychamp Watch & Jewellery Group Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. We can see Citychamp Watch & Jewellery Group's ROCE is meaningfully below the Luxury industry average of 10.0%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Putting aside Citychamp Watch & Jewellery Group'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.

Citychamp Watch & Jewellery Group's current ROCE of 2.1% is lower than 3 years ago, when the company reported a 5.2% ROCE. 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. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If Citychamp Watch & Jewellery Group is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.