Today we are going to look at AKM Industrial Company Limited (HKG:1639) to see whether it might be an attractive investment prospect. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. 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 measures the amount of pre-tax profits a company can generate from the capital employed in its 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?

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 AKM Industrial:

0.0089 = HK$11m ÷ (HK$1.7b - HK$430m) (Based on the trailing twelve months to June 2019.)

Therefore, AKM Industrial has an ROCE of 0.9%.

Check out our latest analysis for AKM Industrial

Does AKM Industrial Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. In this analysis, AKM Industrial's ROCE appears meaningfully below the 9.9% average reported by the Electronic industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Independently of how AKM Industrial compares to its industry, its ROCE in absolute terms is low; especially compared to the ~1.6% available in government bonds. It is likely that there are more attractive prospects out there.

AKM Industrial delivered an ROCE of 0.9%, which is better than 3 years ago, as was making losses back then. That suggests the business has returned to profitability. The image below shows how AKM Industrial's ROCE compares to its industry, and you can click it to see more detail on its 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 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 AKM Industrial? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.