In This Article:
Today we'll evaluate Ming Fai International Holdings Limited (HKG:3828) 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.
Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed 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. 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 Ming Fai International Holdings:
0.12 = HK$135m ÷ (HK$1.8b - HK$690m) (Based on the trailing twelve months to December 2019.)
Therefore, Ming Fai International Holdings has an ROCE of 12%.
Check out our latest analysis for Ming Fai International Holdings
Is Ming Fai International Holdings's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Ming Fai International Holdings's ROCE appears to be around the 12% average of the Personal Products industry. Regardless of where Ming Fai International Holdings sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
You can see in the image below how Ming Fai International Holdings's ROCE compares to its industry. Click to see more on past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. How cyclical is Ming Fai International Holdings? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
How Ming Fai International Holdings's Current Liabilities Impact 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. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.