In This Article:
Today we are going to look at Luks Group (Vietnam Holdings) Company Limited (HKG:366) 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. 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.
Understanding Return On Capital Employed (ROCE)
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. 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.’
So, How Do We Calculate ROCE?
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 Luks Group (Vietnam Holdings):
0.028 = HK$85m ÷ (HK$2.8b – HK$248m) (Based on the trailing twelve months to June 2018.)
Therefore, Luks Group (Vietnam Holdings) has an ROCE of 2.8%.
View our latest analysis for Luks Group (Vietnam Holdings)
Want to help shape the future of investing tools and platforms? Take the survey and be part of one of the most advanced studies of stock market investors to date.
Is Luks Group (Vietnam Holdings)’s ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. In this analysis, Luks Group (Vietnam Holdings)’s ROCE appears meaningfully below the 14% average reported by the Basic Materials industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Putting aside Luks Group (Vietnam 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.
Luks Group (Vietnam Holdings)’s current ROCE of 2.8% is lower than its ROCE in the past, which was 4.3%, 3 years ago. So investors might consider if it has had issues recently.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if Luks Group (Vietnam Holdings) has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.