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Today we are going to look at CCID Consulting Company Limited (HKG:8235) to see whether it might be an attractive investment prospect. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
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.
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. All else being equal, a better business will have a higher ROCE. 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?
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 CCID Consulting:
0.21 = CN¥36m ÷ (CN¥262m - CN¥90m) (Based on the trailing twelve months to March 2019.)
Therefore, CCID Consulting has an ROCE of 21%.
View our latest analysis for CCID Consulting
Is CCID Consulting's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. CCID Consulting's ROCE appears to be substantially greater than the 12% average in the IT industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Putting aside its position relative to its industry for now, in absolute terms, CCID Consulting's ROCE is currently very good.
Our data shows that CCID Consulting currently has an ROCE of 21%, compared to its ROCE of 9.6% 3 years ago. This makes us wonder if the company is improving.
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. How cyclical is CCID Consulting? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.