In This Article:
Today we'll evaluate Deson Development International Holdings Limited (HKG:262) to determine whether it could have potential as an investment idea. 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, we'll go over how we calculate ROCE. Then we'll compare its ROCE 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. 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'.
So, How Do We Calculate ROCE?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Deson Development International Holdings:
0.0031 = HK$6.0m ÷ (HK$2.3b - HK$369m) (Based on the trailing twelve months to September 2019.)
So, Deson Development International Holdings has an ROCE of 0.3%.
View our latest analysis for Deson Development International Holdings
Is Deson Development International Holdings's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. We can see Deson Development International Holdings's ROCE is meaningfully below the Construction industry average of 12%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how Deson Development International Holdings compares to its industry, its ROCE in absolute terms is low; especially compared to the ~1.6% available in government bonds. There are potentially more appealing investments elsewhere.
Deson Development International Holdings delivered an ROCE of 0.3%, which is better than 3 years ago, as was making losses back then. That suggests the business has returned to profitability. The image below shows how Deson Development International Holdings'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. If Deson Development International Holdings is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.