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Today we'll evaluate Hong Kong Economic Times Holdings Limited (HKG:423) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
Firstly, 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.
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. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. 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 Hong Kong Economic Times Holdings:
0.10 = HK$96m ÷ (HK$1.3b - HK$303m) (Based on the trailing twelve months to September 2018.)
Therefore, Hong Kong Economic Times Holdings has an ROCE of 10%.
See our latest analysis for Hong Kong Economic Times Holdings
Does Hong Kong Economic Times Holdings Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Hong Kong Economic Times Holdings's ROCE is meaningfully better than the 7.3% average in the Media industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of where Hong Kong Economic Times Holdings sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Our data shows that Hong Kong Economic Times Holdings currently has an ROCE of 10%, compared to its ROCE of 6.0% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if Hong Kong Economic Times Holdings has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.