In This Article:
Today we'll look at Kam Hing International Holdings Limited (HKG:2307) and reflect on its potential as an investment. 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.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. 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'.
How Do You Calculate Return On Capital Employed?
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 Kam Hing International Holdings:
0.042 = HK$112m ÷ (HK$4.6b - HK$2.0b) (Based on the trailing twelve months to June 2019.)
Therefore, Kam Hing International Holdings has an ROCE of 4.2%.
See our latest analysis for Kam Hing International Holdings
Is Kam Hing International Holdings's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. We can see Kam Hing International Holdings's ROCE is meaningfully below the Luxury industry average of 9.6%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Putting aside Kam Hing International Holdings's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. There are potentially more appealing investments elsewhere.
You can see in the image below how Kam Hing International Holdings'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. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if Kam Hing International Holdings has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.