In This Article:
Today we are going to look at Wai Hung Group Holdings Limited (HKG:3321) to see whether it might be an attractive investment prospect. 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 of all, we'll work out how to calculate ROCE. 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 measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. 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 Wai Hung Group Holdings:
0.25 = MO$61m ÷ (MO$290m - MO$48m) (Based on the trailing twelve months to June 2019.)
Therefore, Wai Hung Group Holdings has an ROCE of 25%.
Check out our latest analysis for Wai Hung Group Holdings
Does Wai Hung Group Holdings Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Wai Hung Group Holdings's ROCE is meaningfully better than the 10% average in the Commercial Services industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of the industry comparison, in absolute terms, Wai Hung Group Holdings's ROCE currently appears to be excellent.
We can see that, Wai Hung Group Holdings currently has an ROCE of 25%, less than the 56% it reported 3 years ago. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how Wai Hung Group Holdings'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. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. How cyclical is Wai Hung Group Holdings? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.