Today we'll evaluate Sun Hing Printing Holdings Limited (HKG:1975) to determine whether it could have potential as an investment idea. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.

How Do You Calculate Return On Capital Employed?

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 Sun Hing Printing Holdings:

0.15 = HK$48m ÷ (HK$390m - HK$67m) (Based on the trailing twelve months to December 2019.)

So, Sun Hing Printing Holdings has an ROCE of 15%.

See our latest analysis for Sun Hing Printing Holdings

Is Sun Hing Printing Holdings's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. It appears that Sun Hing Printing Holdings's ROCE is fairly close to the Commercial Services industry average of 13%. Independently of how Sun Hing Printing Holdings compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

We can see that, Sun Hing Printing Holdings currently has an ROCE of 15%, less than the 34% it reported 3 years ago. This makes us wonder if the business is facing new challenges. The image below shows how Sun Hing Printing 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 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. You can check if Sun Hing Printing Holdings has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

Sun Hing Printing Holdings's Current Liabilities And Their Impact On Its ROCE

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that 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.