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Today we are going to look at C Cheng Holdings Limited (HKG:1486) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. 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 C Cheng Holdings:
0.15 = HK$68m ÷ (HK$668m - HK$214m) (Based on the trailing twelve months to December 2018.)
So, C Cheng Holdings has an ROCE of 15%.
See our latest analysis for C Cheng Holdings
Does C Cheng Holdings Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that C Cheng Holdings's ROCE is meaningfully better than the 12% average in the Professional 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. Separate from C Cheng Holdings's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
We can see that , C Cheng Holdings currently has an ROCE of 15%, less than the 20% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds. You can click on the image below to see (in greater detail) how C Cheng Holdings'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. 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for C Cheng Holdings.