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Today we are going to look at Pico Far East Holdings Limited (HKG:752) 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. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting 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. 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?
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 Pico Far East Holdings:
0.13 = HK$337m ÷ (HK$4.5b - HK$2.0b) (Based on the trailing twelve months to April 2019.)
Therefore, Pico Far East Holdings has an ROCE of 13%.
View our latest analysis for Pico Far East Holdings
Does Pico Far East Holdings Have A Good ROCE?
One way to assess ROCE is to compare similar companies. In our analysis, Pico Far East Holdings's ROCE is meaningfully higher than the 8.3% average in the Media industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where Pico Far East Holdings sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
We can see that , Pico Far East Holdings currently has an ROCE of 13%, less than the 21% it reported 3 years ago. This makes us wonder if the business is facing new challenges. You can see in the image below how Pico Far East Holdings's ROCE compares to its industry. Click to see more on past growth.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.