In This Article:
Today we'll evaluate Left Field Printing Group Limited (HKG:1540) to determine whether it could have potential as an investment idea. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First, we'll go over how we 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 'return' (pre-tax profit) a company generates from capital employed 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.
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 Left Field Printing Group:
0.098 = AU$5.2m ÷ (AU$65m - AU$12m) (Based on the trailing twelve months to June 2019.)
So, 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?
One way to assess ROCE is to compare similar companies. Using our data, Left Field Printing Group's ROCE appears to be around the 11% average of the Commercial Services industry. Independently of how Left Field Printing Group compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
We can see that, Left Field Printing Group currently has an ROCE of 9.8%, less than the 18% it reported 3 years ago. 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.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if Left Field Printing Group has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.