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Today we are going to look at Kwoon Chung Bus Holdings Limited (HKG:306) to see whether it might be an attractive investment prospect. 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.
Understanding Return On Capital Employed (ROCE)
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. 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?
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 Kwoon Chung Bus Holdings:
0.053 = HK$211m ÷ (HK$5.0b – HK$1.6b) (Based on the trailing twelve months to September 2018.)
So, Kwoon Chung Bus Holdings has an ROCE of 5.3%.
Check out our latest analysis for Kwoon Chung Bus Holdings
Does Kwoon Chung Bus Holdings Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Kwoon Chung Bus Holdings’s ROCE appears to be around the 5.2% average of the Transportation industry. Aside from the industry comparison, Kwoon Chung Bus Holdings’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
As we can see, Kwoon Chung Bus Holdings currently has an ROCE of 5.3%, less than the 19% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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. If Kwoon Chung Bus Holdings is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.