In This Article:
Today we are going to look at Goodbaby International Holdings Limited (HKG:1086) to see whether it might be an attractive investment prospect. 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. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on 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. In general, businesses with a higher ROCE are usually better quality. 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'.
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 Goodbaby International Holdings:
0.041 = HK$316m ÷ (HK$11b - HK$3.2b) (Based on the trailing twelve months to December 2019.)
So, Goodbaby International Holdings has an ROCE of 4.1%.
Check out our latest analysis for Goodbaby International Holdings
Is Goodbaby International Holdings's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Goodbaby International Holdings's ROCE appears to be significantly below the 12% average in the Leisure industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Putting aside Goodbaby International Holdings's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. It is likely that there are more attractive prospects out there.
The image below shows how Goodbaby International Holdings's ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is 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 only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.