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Today we’ll evaluate Television Broadcasts Limited (HKG:511) 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. Then we’ll compare its ROCE to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.
Understanding 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. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. 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 Television Broadcasts:
0.039 = HK$388m ÷ (HK$11b – HK$926m) (Based on the trailing twelve months to June 2018.)
Therefore, Television Broadcasts has an ROCE of 3.9%.
See our latest analysis for Television Broadcasts
Does Television Broadcasts Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Television Broadcasts’s ROCE appears to be significantly below the 10% average in the Media industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Putting aside Television Broadcasts’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.
As we can see, Television Broadcasts currently has an ROCE of 3.9%, less than the 13% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds.
When considering this metric, keep in mind that it is backwards looking, and 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. 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 Television Broadcasts.