Today we'll look at Best Pacific International Holdings Limited (HKG:2111) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First, we'll go over how we calculate ROCE. 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 is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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. 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'.

How Do You Calculate Return On Capital Employed?

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 Best Pacific International Holdings:

0.11 = HK$386m ÷ (HK$5.3b - HK$1.8b) (Based on the trailing twelve months to June 2019.)

Therefore, Best Pacific International Holdings has an ROCE of 11%.

See our latest analysis for Best Pacific International Holdings

Is Best Pacific International Holdings's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. We can see Best Pacific International Holdings's ROCE is around the 9.5% average reported by the Luxury industry. Separate from Best Pacific International Holdings's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

We can see that, Best Pacific International Holdings currently has an ROCE of 11%, less than the 21% it reported 3 years ago. So investors might consider if it has had issues recently. The image below shows how Best Pacific International Holdings's ROCE compares to its industry, and you can click it to see more detail on its past growth.

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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Best Pacific International Holdings.

How Best Pacific International Holdings's Current Liabilities Impact Its ROCE

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Best Pacific International Holdings has total assets of HK$5.3b and current liabilities of HK$1.8b. Therefore its current liabilities are equivalent to approximately 34% of its total assets. Best Pacific International Holdings has a medium level of current liabilities, which would boost the ROCE.

Our Take On Best Pacific International Holdings's ROCE

Best Pacific International Holdings's ROCE does look good, but the level of current liabilities also contribute to that. There might be better investments than Best Pacific International Holdings out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.