In This Article:
Today we'll evaluate Best Mart 360 Holdings Limited (HKG:2360) to determine whether it could have potential as an investment idea. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding 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. 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.
So, How Do We Calculate ROCE?
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 Best Mart 360 Holdings:
0.20 = HK$91m ÷ (HK$696m - HK$237m) (Based on the trailing twelve months to September 2019.)
So, Best Mart 360 Holdings has an ROCE of 20%.
See our latest analysis for Best Mart 360 Holdings
Is Best Mart 360 Holdings's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Best Mart 360 Holdings's ROCE is meaningfully better than the 8.3% average in the Consumer Retailing industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Putting aside its position relative to its industry for now, in absolute terms, Best Mart 360 Holdings's ROCE is currently very good.
Best Mart 360 Holdings's current ROCE of 20% is lower than 3 years ago, when the company reported a 61% ROCE. This makes us wonder if the business is facing new challenges. You can see in the image below how Best Mart 360 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 Best Mart 360 Holdings? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.