Today we'll evaluate Golden Eagle Retail Group Limited (HKG:3308) to determine whether it could have potential as an investment idea. 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.
First, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. 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 Golden Eagle Retail Group:
0.17 = CN¥2.4b ÷ (CN¥23b - CN¥9.2b) (Based on the trailing twelve months to June 2019.)
So, Golden Eagle Retail Group has an ROCE of 17%.
See our latest analysis for Golden Eagle Retail Group
Does Golden Eagle Retail Group Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Using our data, we find that Golden Eagle Retail Group's ROCE is meaningfully better than the 6.2% average in the Multiline Retail industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from Golden Eagle Retail Group's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
We can see that, Golden Eagle Retail Group currently has an ROCE of 17% compared to its ROCE 3 years ago, which was 9.3%. This makes us think the business might be improving. The image below shows how Golden Eagle Retail Group's ROCE compares to its industry, and you can click it to see more detail on its past growth.
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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Golden Eagle Retail Group.