In This Article:
Today we are going to look at Pak Tak International Limited (HKG:2668) 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. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. 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'.
So, How Do We Calculate ROCE?
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 Pak Tak International:
0.07 = HK$39m ÷ (HK$1.1b - HK$521m) (Based on the trailing twelve months to December 2019.)
Therefore, Pak Tak International has an ROCE of 7.0%.
View our latest analysis for Pak Tak International
Is Pak Tak International's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. In this analysis, Pak Tak International's ROCE appears meaningfully below the 9.3% average reported by the Luxury industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Separate from how Pak Tak International stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.
Pak Tak International reported an ROCE of 7.0% -- better than 3 years ago, when the company didn't make a profit. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how Pak Tak International'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 deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. If Pak Tak International is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.