In This Article:
Today we are going to look at KangLi International Holdings Limited (HKG:6890) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on 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. In brief, it is a useful tool, but it is not without drawbacks. 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?
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 KangLi International Holdings:
0.062 = CN¥42m ÷ (CN¥1.4b - CN¥742m) (Based on the trailing twelve months to December 2019.)
Therefore, KangLi International Holdings has an ROCE of 6.2%.
See our latest analysis for KangLi International Holdings
Is KangLi International Holdings's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, KangLi International Holdings's ROCE appears to be around the 7.1% average of the Metals and Mining industry. Setting aside the industry comparison for now, KangLi International Holdings's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.
KangLi International Holdings's current ROCE of 6.2% is lower than 3 years ago, when the company reported a 13% ROCE. So investors might consider if it has had issues recently. You can see in the image below how KangLi International 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Given the industry it operates in, KangLi International Holdings could be considered cyclical. You can check if KangLi International Holdings has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.