In This Article:
Today we'll look at Shun Ho Property Investments Limited (HKG:219) and reflect on its potential as an investment. 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.
First up, we'll look at what ROCE is and how we calculate it. 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.
What is 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. In brief, it is a useful tool, but it is not without drawbacks. 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 Shun Ho Property Investments:
0.035 = HK$323m ÷ (HK$9.6b - HK$317m) (Based on the trailing twelve months to June 2019.)
Therefore, Shun Ho Property Investments has an ROCE of 3.5%.
See our latest analysis for Shun Ho Property Investments
Is Shun Ho Property Investments's ROCE Good?
One way to assess ROCE is to compare similar companies. We can see Shun Ho Property Investments's ROCE is meaningfully below the Hospitality industry average of 5.4%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Putting aside Shun Ho Property Investments's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. Readers may wish to look for more rewarding investments.
We can see that, Shun Ho Property Investments currently has an ROCE of 3.5% compared to its ROCE 3 years ago, which was 2.8%. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how Shun Ho Property Investments's past growth compares to other companies.
When considering this metric, keep in mind that it is backwards looking, and 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. If Shun Ho Property Investments is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.