Has Legend Holdings Corporation (HKG:3396) Been Employing Capital Shrewdly?

In This Article:

Today we'll look at Legend Holdings Corporation (HKG:3396) and reflect on its potential as an investment. 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. 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. All else being equal, a better business will have a higher ROCE. 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?

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 Legend Holdings:

0.066 = CN¥14b ÷ (CN¥587b - CN¥373b) (Based on the trailing twelve months to June 2019.)

Therefore, Legend Holdings has an ROCE of 6.6%.

View our latest analysis for Legend Holdings

Does Legend Holdings Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. We can see Legend Holdings's ROCE is around the 7.9% average reported by the Tech industry. Separate from how Legend Holdings stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.

Our data shows that Legend Holdings currently has an ROCE of 6.6%, compared to its ROCE of 1.4% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly. You can click on the image below to see (in greater detail) how Legend Holdings's past growth compares to other companies.

SEHK:3396 Past Revenue and Net Income, January 20th 2020
SEHK:3396 Past Revenue and Net Income, January 20th 2020

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. ROCE is, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Legend Holdings.

How Legend Holdings's Current Liabilities Impact Its ROCE

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.