In This Article:
Today we are going to look at A.Plus Group Holdings Limited (HKG:1841) 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 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.
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. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
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 A.Plus Group Holdings:
0.23 = HK$32m ÷ (HK$172m - HK$31m) (Based on the trailing twelve months to September 2019.)
Therefore, A.Plus Group Holdings has an ROCE of 23%.
See our latest analysis for A.Plus Group Holdings
Does A.Plus Group Holdings Have A Good ROCE?
One way to assess ROCE is to compare similar companies. In our analysis, A.Plus Group Holdings's ROCE is meaningfully higher than the 10.0% average in the Commercial Services industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of the industry comparison, in absolute terms, A.Plus Group Holdings's ROCE currently appears to be excellent.
We can see that, A.Plus Group Holdings currently has an ROCE of 23%, less than the 33% it reported 3 years ago. So investors might consider if it has had issues recently. The image below shows how A.Plus Group 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. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is only a point-in-time measure. If A.Plus Group Holdings is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
A.Plus Group Holdings's Current Liabilities And Their Impact On Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.