In This Article:
Today we'll look at Casablanca Group Limited (HKG:2223) and reflect on its potential as an investment. 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. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. 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 Casablanca Group:
0.03 = HK$12m ÷ (HK$515m - HK$108m) (Based on the trailing twelve months to December 2018.)
So, Casablanca Group has an ROCE of 3.0%.
Check out our latest analysis for Casablanca Group
Does Casablanca Group Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. In this analysis, Casablanca Group's ROCE appears meaningfully below the 10% average reported by the Consumer Durables industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Regardless of how Casablanca Group stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). Readers may wish to look for more rewarding investments.
Casablanca Group has an ROCE of 3.0%, but it didn't have an ROCE 3 years ago, since it was unprofitable. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how Casablanca Group's past growth compares to other companies.
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. If Casablanca Group is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.