In This Article:
Today we are going to look at Left Field Printing Group Limited (HKG:1540) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting 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. Overall, it is a valuable metric that has its flaws. 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 Left Field Printing Group:
0.098 = AU$5.2m ÷ (AU$65m - AU$12m) (Based on the trailing twelve months to June 2019.)
Therefore, Left Field Printing Group has an ROCE of 9.8%.
See our latest analysis for Left Field Printing Group
Is Left Field Printing Group's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, Left Field Printing Group's ROCE appears to be around the 9.9% average of the Commercial Services industry. Aside from the industry comparison, Left Field Printing Group'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.
Left Field Printing Group's current ROCE of 9.8% is lower than 3 years ago, when the company reported a 18% ROCE. This makes us wonder if the business is facing new challenges. You can click on the image below to see (in greater detail) how Left Field Printing Group's past growth compares to other companies.
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. If Left Field Printing Group is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.