Today we'll evaluate HK Electric Investments and HK Electric Investments Limited (HKG:2638) 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. 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 is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. 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?

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 HK Electric Investments and HK Electric Investments:

0.043 = HK$4.5b ÷ (HK$108b - HK$2.9b) (Based on the trailing twelve months to June 2019.)

Therefore, HK Electric Investments and HK Electric Investments has an ROCE of 4.3%.

View our latest analysis for HK Electric Investments and HK Electric Investments

Is HK Electric Investments and HK Electric Investments's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. We can see HK Electric Investments and HK Electric Investments's ROCE is around the 4.9% average reported by the Electric Utilities industry. Regardless of how HK Electric Investments and HK Electric Investments 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.

You can see in the image below how HK Electric Investments and HK Electric Investments's ROCE compares to its industry. Click to see more on past growth.

It is important to remember that ROCE shows past performance, and is 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.