In This Article:
Today we'll evaluate Sun Hing Vision Group Holdings Limited (HKG:125) to determine whether it could have potential as an investment idea. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect 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. 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 Sun Hing Vision Group Holdings:
0.073 = HK$69m ÷ (HK$1.2b - HK$257m) (Based on the trailing twelve months to March 2019.)
So, Sun Hing Vision Group Holdings has an ROCE of 7.3%.
View our latest analysis for Sun Hing Vision Group Holdings
Is Sun Hing Vision Group Holdings's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Sun Hing Vision Group Holdings's ROCE appears to be significantly below the 9.5% average in the Luxury industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Setting aside the industry comparison for now, Sun Hing Vision Group Holdings's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
You can see in the image below how Sun Hing Vision Group Holdings's ROCE compares to its industry. Click to see more on past growth.
When considering this metric, keep in mind that it is backwards looking, and 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. You can check if Sun Hing Vision Group Holdings has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.