Come Sure Group (Holdings) Limited (HKG:794) Earns A Nice Return On Capital Employed

Andrew Carroll

Wed, Feb 6, 2019, 5:49 PM

Today we’ll evaluate Come Sure Group (Holdings) Limited (HKG:794) to determine whether it could have potential as an investment idea. 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.

Firstly, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. Finally, we’ll look at how its current liabilities affect 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. Generally speaking a higher ROCE is better. 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?

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 Come Sure Group (Holdings):

0.16 = HK$127m ÷ (HK$1.3b – HK$649m) (Based on the trailing twelve months to September 2018.)

Therefore, Come Sure Group (Holdings) has an ROCE of 16%.

View our latest analysis for Come Sure Group (Holdings)

Is Come Sure Group (Holdings)’s ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Come Sure Group (Holdings)’s ROCE is meaningfully higher than the 13% average in the Packaging industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from Come Sure Group (Holdings)’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

As we can see, Come Sure Group (Holdings) currently has an ROCE of 16% compared to its ROCE 3 years ago, which was 1.3%. This makes us wonder if the company is improving.

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 Come Sure Group (Holdings)? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.