In This Article:
Today we'll evaluate Vision International Holdings Limited (HKG:8107) 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. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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 Vision International Holdings:
0.13 = HK$9.5m ÷ (HK$102m - HK$32m) (Based on the trailing twelve months to September 2019.)
Therefore, Vision International Holdings has an ROCE of 13%.
View our latest analysis for Vision International Holdings
Is Vision International Holdings's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Vision International Holdings's ROCE is meaningfully better than the 9.6% average in the Luxury industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Independently of how Vision International Holdings compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
Vision International Holdings's current ROCE of 13% is lower than 3 years ago, when the company reported a 67% ROCE. Therefore we wonder if the company is facing new headwinds. You can see in the image below how Vision International Holdings's ROCE compares to its industry. Click to see more on past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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, after all, simply a snap shot of a single year. If Vision International Holdings is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.