Today we'll evaluate Glory Sun Financial Group Limited (HKG:1282) to determine whether it could have potential as an investment idea. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. 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'.

How Do You Calculate Return On Capital Employed?

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 Glory Sun Financial Group:

0.027 = HK$198m ÷ (HK$11b - HK$3.5b) (Based on the trailing twelve months to December 2018.)

So, Glory Sun Financial Group has an ROCE of 2.7%.

See our latest analysis for Glory Sun Financial Group

Does Glory Sun Financial Group Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. We can see Glory Sun Financial Group's ROCE is meaningfully below the Tech industry average of 7.1%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how Glory Sun Financial 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.

We can see that , Glory Sun Financial Group currently has an ROCE of 2.7%, less than the 5.2% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds. The image below shows how Glory Sun Financial Group's ROCE compares to its industry, and you can click it to see more detail on its past growth.

It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. How cyclical is Glory Sun Financial Group? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.