In This Article:
Today we'll evaluate Citychamp Watch & Jewellery Group Limited (HKG:256) 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, we'll go over how we 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.
Understanding 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. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
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 Citychamp Watch & Jewellery Group:
0.017 = HK$302m ÷ (HK$20b - HK$2.2b) (Based on the trailing twelve months to June 2019.)
Therefore, Citychamp Watch & Jewellery Group has an ROCE of 1.7%.
View our latest analysis for Citychamp Watch & Jewellery Group
Does Citychamp Watch & Jewellery Group Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. In this analysis, Citychamp Watch & Jewellery Group's ROCE appears meaningfully below the 9.6% average reported by the Luxury industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how Citychamp Watch & Jewellery Group stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). Readers may wish to look for more rewarding investments.
Citychamp Watch & Jewellery Group's current ROCE of 1.7% is lower than 3 years ago, when the company reported a 4.0% ROCE. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how Citychamp Watch & Jewellery Group's past growth compares to other companies.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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, after all, simply a snap shot of a single year. If Citychamp Watch & Jewellery Group is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.