Today we are going to look at Mulsanne Group Holding Limited (HKG:1817) 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, we'll go over how we calculate ROCE. 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 measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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. 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 Mulsanne Group Holding:

0.25 = CN¥531m ÷ (CN¥3.5b - CN¥1.4b) (Based on the trailing twelve months to June 2019.)

Therefore, Mulsanne Group Holding has an ROCE of 25%.

See our latest analysis for Mulsanne Group Holding

Does Mulsanne Group Holding Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Mulsanne Group Holding's ROCE appears to be substantially greater than the 12% average in the Specialty Retail industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of the industry comparison, in absolute terms, Mulsanne Group Holding's ROCE currently appears to be excellent.

You can click on the image below to see (in greater detail) how Mulsanne Group Holding's past growth compares to other companies.

It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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. How cyclical is Mulsanne Group Holding? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

Mulsanne Group Holding'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.