Today we are going to look at MS Group Holdings Limited (HKG:1451) 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.

Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. 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?

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 MS Group Holdings:

0.11 = HK$19m ÷ (HK$201m - HK$34m) (Based on the trailing twelve months to December 2019.)

So, MS Group Holdings has an ROCE of 11%.

Check out our latest analysis for MS Group Holdings

Does MS Group Holdings Have A Good ROCE?

One way to assess ROCE is to compare similar companies. It appears that MS Group Holdings's ROCE is fairly close to the Packaging industry average of 12%. Independently of how MS Group Holdings compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

MS Group Holdings's current ROCE of 11% is lower than its ROCE in the past, which was 53%, 3 years ago. Therefore we wonder if the company is facing new headwinds. You can click on the image below to see (in greater detail) how MS Group Holdings's past growth compares to other companies.

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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. ROCE is, after all, simply a snap shot of a single year. You can check if MS Group Holdings has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

MS Group Holdings's Current Liabilities And Their Impact On 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. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.