In This Article:
Today we'll evaluate Takbo Group Holdings Limited (HKG:8436) to determine whether it could have potential as an investment idea. 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 of all, we'll work out how to 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 measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. 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.'
How Do You Calculate Return On Capital Employed?
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 Takbo Group Holdings:
0.19 = HK$33m ÷ (HK$190m - HK$19m) (Based on the trailing twelve months to December 2018.)
So, Takbo Group Holdings has an ROCE of 19%.
View our latest analysis for Takbo Group Holdings
Does Takbo Group Holdings Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Takbo Group Holdings's ROCE appears to be substantially greater than the 11% average in the Personal Products 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 where Takbo Group Holdings sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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, after all, simply a snap shot of a single year. You can check if Takbo Group Holdings has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Takbo 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. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.