Today we'll evaluate Regina Miracle International (Holdings) Limited (HKG:2199) 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. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.

What is 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. 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'.

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 Regina Miracle International (Holdings):

0.066 = HK$370m ÷ (HK$7.4b - HK$1.9b) (Based on the trailing twelve months to September 2019.)

So, Regina Miracle International (Holdings) has an ROCE of 6.6%.

Check out our latest analysis for Regina Miracle International (Holdings)

Is Regina Miracle International (Holdings)'s ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. We can see Regina Miracle International (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. Separate from how Regina Miracle International (Holdings) 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.

Regina Miracle International (Holdings)'s current ROCE of 6.6% is lower than 3 years ago, when the company reported a 12% ROCE. This makes us wonder if the business is facing new challenges. The image below shows how Regina Miracle International (Holdings)'s ROCE compares to its industry, and you can click it to see more detail on its past growth.

It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for Regina Miracle International (Holdings).