In This Article:
Today we’ll evaluate Hop Fung Group Holdings Limited (HKG:2320) to determine whether it could have potential as an investment idea. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
Firstly, 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 measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. 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?
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 Hop Fung Group Holdings:
0.064 = HK$166m ÷ (HK$2.2b – HK$421m) (Based on the trailing twelve months to June 2018.)
So, Hop Fung Group Holdings has an ROCE of 6.4%.
View our latest analysis for Hop Fung Group Holdings
Want to help shape the future of investing tools and platforms? Take the survey and be part of one of the most advanced studies of stock market investors to date.
Does Hop Fung Group Holdings Have A Good ROCE?
One way to assess ROCE is to compare similar companies. We can see Hop Fung Group Holdings’s ROCE is meaningfully below the Packaging industry average of 13%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Separate from how Hop Fung Group Holdings stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.
In our analysis, Hop Fung Group Holdings’s ROCE appears to be 6.4%, compared to 3 years ago, when its ROCE was 1.6%. This makes us wonder if the company is improving.
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. ROCE is, after all, simply a snap shot of a single year. How cyclical is Hop Fung Group Holdings? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.