In This Article:
Today we'll look at Yangtzekiang Garment Limited (HKG:294) and reflect on its potential as an investment. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its 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 is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. 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.
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 Yangtzekiang Garment:
0.0092 = HK$11m ÷ (HK$1.4b - HK$104m) (Based on the trailing twelve months to March 2019.)
Therefore, Yangtzekiang Garment has an ROCE of 0.9%.
See our latest analysis for Yangtzekiang Garment
Does Yangtzekiang Garment Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. In this analysis, Yangtzekiang Garment's ROCE appears meaningfully below the 9.5% 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. Putting aside Yangtzekiang Garment's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. There are potentially more appealing investments elsewhere.
Yangtzekiang Garment's current ROCE of 0.9% is lower than its ROCE in the past, which was 1.6%, 3 years ago. So investors might consider if it has had issues recently. You can see in the image below how Yangtzekiang Garment's ROCE compares to its industry. Click to see more on past growth.
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 only a point-in-time measure. How cyclical is Yangtzekiang Garment? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.