In This Article:
Today we'll evaluate S.A.S. Dragon Holdings Limited (HKG:1184) 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 of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. 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'.
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 S.A.S. Dragon Holdings:
0.22 = HK$484m ÷ (HK$5.7b - HK$3.5b) (Based on the trailing twelve months to June 2019.)
Therefore, S.A.S. Dragon Holdings has an ROCE of 22%.
View our latest analysis for S.A.S. Dragon Holdings
Is S.A.S. Dragon Holdings's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. S.A.S. Dragon Holdings's ROCE appears to be substantially greater than the 9.8% average in the Electronic industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the comparison to its industry for a moment, S.A.S. Dragon Holdings's ROCE in absolute terms currently looks quite high.
Our data shows that S.A.S. Dragon Holdings currently has an ROCE of 22%, compared to its ROCE of 13% 3 years ago. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how S.A.S. Dragon Holdings's past growth compares to other companies.
When considering this metric, keep in mind that it is backwards looking, and 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. How cyclical is S.A.S. Dragon Holdings? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.