In This Article:
Today we'll look at DaChan Food (Asia) Limited (HKG:3999) and reflect on its potential as an investment. 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. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
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. In brief, it is a useful tool, but it is not without drawbacks. 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?
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 DaChan Food (Asia):
0.078 = CN¥187m ÷ (CN¥4.0b - CN¥1.6b) (Based on the trailing twelve months to September 2019.)
So, DaChan Food (Asia) has an ROCE of 7.8%.
View our latest analysis for DaChan Food (Asia)
Does DaChan Food (Asia) Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. We can see DaChan Food (Asia)'s ROCE is meaningfully below the Food industry average of 10%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Aside from the industry comparison, DaChan Food (Asia)'s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
You can see in the image below how DaChan Food (Asia)'s ROCE compares to its industry. Click to see more on past growth.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If DaChan Food (Asia) is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.