In This Article:
Today we'll evaluate Hin Sang Group (International) Holding Co. Ltd. (HKG:6893) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. 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.
How Do You Calculate Return On Capital Employed?
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 Hin Sang Group (International) Holding:
0.0087 = HK$4.9m ÷ (HK$626m - HK$64m) (Based on the trailing twelve months to September 2019.)
So, Hin Sang Group (International) Holding has an ROCE of 0.9%.
See our latest analysis for Hin Sang Group (International) Holding
Is Hin Sang Group (International) Holding's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Hin Sang Group (International) Holding's ROCE is meaningfully below the Personal Products industry average of 11%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Regardless of how Hin Sang Group (International) Holding stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). It is likely that there are more attractive prospects out there.
Hin Sang Group (International) Holding's current ROCE of 0.9% is lower than its ROCE in the past, which was 1.7%, 3 years ago. This makes us wonder if the business is facing new challenges. You can click on the image below to see (in greater detail) how Hin Sang Group (International) Holding's past growth compares to other companies.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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. You can check if Hin Sang Group (International) Holding has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.