Today we'll evaluate Samson Holding Ltd. (HKG:531) to determine whether it could have potential as an investment idea. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed 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'.
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 Samson Holding:
0.0049 = US$1.9m ÷ (US$664m - US$278m) (Based on the trailing twelve months to June 2019.)
Therefore, Samson Holding has an ROCE of 0.5%.
Check out our latest analysis for Samson Holding
Does Samson Holding Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Samson Holding's ROCE appears to be significantly below the 10% average in the Consumer Durables industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how Samson Holding stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). Readers may wish to look for more rewarding investments.
We can see that, Samson Holding currently has an ROCE of 0.5%, less than the 5.7% it reported 3 years ago. This makes us wonder if the business is facing new challenges. The image below shows how Samson Holding'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 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 Samson Holding has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.