Today we are going to look at Huarchi Global Group Holdings Limited (HKG:2296) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. 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 Huarchi Global Group Holdings:

0.29 = MO$75m ÷ (MO$417m - MO$160m) (Based on the trailing twelve months to December 2019.)

So, Huarchi Global Group Holdings has an ROCE of 29%.

View our latest analysis for Huarchi Global Group Holdings

Does Huarchi Global Group Holdings Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Huarchi Global Group Holdings's ROCE is meaningfully better than the 12% average in the Construction industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of the industry comparison, in absolute terms, Huarchi Global Group Holdings's ROCE currently appears to be excellent.

You can see in the image below how Huarchi Global Group Holdings's ROCE compares to its industry. Click to see more on past growth.

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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 only a point-in-time measure. You can check if Huarchi Global Group Holdings has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

What Are Current Liabilities, And How Do They Affect Huarchi Global Group Holdings's ROCE?

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Huarchi Global Group Holdings has current liabilities of MO$160m and total assets of MO$417m. Therefore its current liabilities are equivalent to approximately 38% of its total assets. Huarchi Global Group Holdings has a medium level of current liabilities, boosting its ROCE somewhat.

The Bottom Line On Huarchi Global Group Holdings's ROCE

Still, it has a high ROCE, and may be an interesting prospect for further research. Huarchi Global Group Holdings looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.