In This Article:
Today we'll evaluate Jiu Rong Holdings Limited (HKG:2358) to determine whether it could have potential as an investment idea. 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 up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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 Jiu Rong Holdings:
0.019 = HK$12m ÷ (HK$2.1b - HK$1.4b) (Based on the trailing twelve months to December 2019.)
Therefore, Jiu Rong Holdings has an ROCE of 1.9%.
See our latest analysis for Jiu Rong Holdings
Does Jiu Rong Holdings Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Jiu Rong Holdings's ROCE appears to be significantly below the 11% average in the Consumer Durables industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Putting aside Jiu Rong Holdings's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. It is likely that there are more attractive prospects out there.
Jiu Rong Holdings reported an ROCE of 1.9% -- better than 3 years ago, when the company didn't make a profit. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how Jiu Rong Holdings's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. You can check if Jiu Rong Holdings has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.