In This Article:
Today we are going to look at Wing On Company International Limited (HKG:289) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First, 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.
Return On Capital Employed (ROCE): What is it?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. 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'.
So, How Do We Calculate ROCE?
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 Wing On Company International:
0.032 = HK$645m ÷ (HK$21b - HK$593m) (Based on the trailing twelve months to December 2019.)
Therefore, Wing On Company International has an ROCE of 3.2%.
See our latest analysis for Wing On Company International
Is Wing On Company International's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. In this analysis, Wing On Company International's ROCE appears meaningfully below the 7.4% average reported by the Multiline Retail industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how Wing On Company International stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). It is likely that there are more attractive prospects out there.
The image below shows how Wing On Company International'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. If Wing On Company International is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Do Wing On Company International's Current Liabilities Skew Its ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.