In This Article:
Today we’ll look at Goldway Education Group Limited (HKG:8160) and reflect on its potential as an investment. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. Last but not least, we’ll look at what impact its current liabilities have on 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. 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 Goldway Education Group:
0.083 = HK$4.0m ÷ (HK$51m – HK$1.9m) (Based on the trailing twelve months to September 2018.)
Therefore, Goldway Education Group has an ROCE of 8.3%.
See our latest analysis for Goldway Education Group
Want to help shape the future of investing tools and platforms? Take the survey and be part of one of the most advanced studies of stock market investors to date.
Is Goldway Education Group’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. We can see Goldway Education Group’s ROCE is meaningfully below the Consumer Services industry average of 13%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Separate from how Goldway Education Group stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.
Goldway Education Group’s current ROCE of 8.3% is lower than 3 years ago, when the company reported a 103% ROCE. This makes us wonder if the business is facing new challenges.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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, after all, simply a snap shot of a single year. How cyclical is Goldway Education Group? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.