In This Article:
Today we are going to look at Pico Far East Holdings Limited (HKG:752) 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.
What is 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. 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?
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
Is Pico Far East Holdings's ROCE Good?
One way to assess ROCE is to compare similar companies. In our analysis, Pico Far East Holdings's ROCE is meaningfully higher than the 6.1% average in the Media industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from Pico Far East Holdings's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
We can see that, Pico Far East Holdings currently has an ROCE of 13%, less than the 21% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds. The image below shows how Pico Far East Holdings's ROCE compares to its industry, and you can click it to see more detail on its past growth.
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 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Pico Far East Holdings.