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Today we'll look at HJ Capital (International) Holdings Company Limited (HKG:982) 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 up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. 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. All else being equal, a better business will have a higher ROCE. 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'.
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 HJ Capital (International) Holdings:
0.0095 = HK$2.0m ÷ (HK$333m - HK$124m) (Based on the trailing twelve months to December 2018.)
So, HJ Capital (International) Holdings has an ROCE of 1.0%.
Check out our latest analysis for HJ Capital (International) Holdings
Does HJ Capital (International) Holdings Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. In this analysis, HJ Capital (International) Holdings's ROCE appears meaningfully below the 10.0% average reported by the Commercial Services industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how HJ Capital (International) Holdings compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.0% available in government bonds. There are potentially more appealing investments elsewhere.
HJ Capital (International) Holdings's current ROCE of 1.0% is lower than its ROCE in the past, which was 19%, 3 years ago. Therefore we wonder if the company is facing new headwinds.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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. How cyclical is HJ Capital (International) Holdings? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.