In This Article:
Today we are going to look at Ever Sunshine Lifestyle Services Group Limited (HKG:1995) 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. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. 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'.
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 Ever Sunshine Lifestyle Services Group:
0.19 = CN¥201m ÷ (CN¥1.8b - CN¥744m) (Based on the trailing twelve months to June 2019.)
So, Ever Sunshine Lifestyle Services Group has an ROCE of 19%.
View our latest analysis for Ever Sunshine Lifestyle Services Group
Is Ever Sunshine Lifestyle Services Group's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Ever Sunshine Lifestyle Services Group's ROCE is meaningfully higher than the 9.9% average in the Commercial Services industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where Ever Sunshine Lifestyle Services Group sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
You can see in the image below how Ever Sunshine Lifestyle Services Group's ROCE compares to its industry. Click to see more on past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. 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 only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Ever Sunshine Lifestyle Services Group.