Today we are going to look at Kingboard Laminates Holdings Limited (HKG:1888) to see whether it might be an attractive investment prospect. 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 up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

What is 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. 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'.

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 Kingboard Laminates Holdings:

0.16 = HK$3.6b ÷ (HK$28b - HK$5.7b) (Based on the trailing twelve months to June 2019.)

Therefore, Kingboard Laminates Holdings has an ROCE of 16%.

View our latest analysis for Kingboard Laminates Holdings

Is Kingboard Laminates Holdings's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, Kingboard Laminates Holdings's ROCE is meaningfully higher than the 9.9% average in the Electronic 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 where Kingboard Laminates Holdings sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

In our analysis, Kingboard Laminates Holdings's ROCE appears to be 16%, compared to 3 years ago, when its ROCE was 9.5%. This makes us think about whether the company has been reinvesting shrewdly. You can see in the image below how Kingboard Laminates 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. 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Kingboard Laminates Holdings.

Do Kingboard Laminates Holdings's Current Liabilities Skew Its ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Kingboard Laminates Holdings has total assets of HK$28b and current liabilities of HK$5.7b. Therefore its current liabilities are equivalent to approximately 20% of its total assets. Low current liabilities are not boosting the ROCE too much.

The Bottom Line On Kingboard Laminates Holdings's ROCE

This is good to see, and with a sound ROCE, Kingboard Laminates Holdings could be worth a closer look. There might be better investments than Kingboard Laminates Holdings out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

Kingboard Laminates Holdings is not the only stock that insiders are buying. For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.