In This Article:
Today we'll look at Win Hanverky Holdings Limited (HKG:3322) 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. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
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 Win Hanverky Holdings:
0.05 = HK$129m ÷ (HK$4.3b - HK$1.7b) (Based on the trailing twelve months to June 2019.)
So, Win Hanverky Holdings has an ROCE of 5.0%.
View our latest analysis for Win Hanverky Holdings
Does Win Hanverky Holdings Have A Good ROCE?
One way to assess ROCE is to compare similar companies. We can see Win Hanverky Holdings's ROCE is meaningfully below the Luxury industry average of 9.6%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Aside from the industry comparison, Win Hanverky Holdings's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.
We can see that, Win Hanverky Holdings currently has an ROCE of 5.0%, less than the 12% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds. The image below shows how Win Hanverky Holdings's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. How cyclical is Win Hanverky Holdings? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.