Why You Should Like TCL Electronics Holdings Limited’s (HKG:1070) ROCE

Cole Patterson

Sat, Feb 9, 2019, 6:33 PM

Today we are going to look at TCL Electronics Holdings Limited (HKG:1070) to see whether it might be an attractive investment prospect. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

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. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. 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 TCL Electronics Holdings:

0.17 = HK$1.1b ÷ (HK$23b – HK$13b) (Based on the trailing twelve months to June 2018.)

So, TCL Electronics Holdings has an ROCE of 17%.

View our latest analysis for TCL Electronics Holdings

Does TCL Electronics Holdings Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. TCL Electronics Holdings’s ROCE appears to be substantially greater than the 9.8% average in the Consumer Durables industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where TCL Electronics Holdings sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

In our analysis, TCL Electronics Holdings’s ROCE appears to be 17%, compared to 3 years ago, when its ROCE was 9.9%. This makes us think the business might be improving.

When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.