Today we'll evaluate iDreamSky Technology Holdings Limited (HKG:1119) 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. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting 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. 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?

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 iDreamSky Technology Holdings:

0.11 = CN¥352m ÷ (CN¥5.6b - CN¥2.3b) (Based on the trailing twelve months to December 2018.)

Therefore, iDreamSky Technology Holdings has an ROCE of 11%.

See our latest analysis for iDreamSky Technology Holdings

Does iDreamSky Technology Holdings Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, iDreamSky Technology Holdings's ROCE appears to be around the 11% average of the Entertainment industry. Regardless of where iDreamSky Technology Holdings sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

We can see that , iDreamSky Technology Holdings currently has an ROCE of 11%, less than the 35% it reported 3 years ago. So investors might consider if it has had issues recently. The image below shows how iDreamSky Technology Holdings's ROCE compares to its industry, and you can click it to see more detail on its past growth.

It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for iDreamSky Technology Holdings.