In This Article:
Today we are going to look at IRC Limited (HKG:1029) 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 of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its 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'.
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 IRC:
0.003 = US$1.5m ÷ (US$618m - US$109m) (Based on the trailing twelve months to June 2019.)
So, IRC has an ROCE of 0.3%.
View our latest analysis for IRC
Is IRC's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. We can see IRC's ROCE is meaningfully below the Metals and Mining industry average of 8.4%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Independently of how IRC compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.0% available in government bonds. Readers may wish to look for more rewarding investments.
We can see that , IRC currently has an ROCE of 0.3%, less than the 10% it reported 3 years ago. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how IRC's past growth compares to other companies.
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 misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. Given the industry it operates in, IRC could be considered cyclical. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.