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Today we'll evaluate Le Saunda Holdings Limited (HKG:738) to determine whether it could have potential as an investment idea. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. 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 amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. 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 Le Saunda Holdings:

0.016 = CN¥20m ÷ (CN¥1.4b - CN¥150m) (Based on the trailing twelve months to August 2018.)

So, Le Saunda Holdings has an ROCE of 1.6%.

View our latest analysis for Le Saunda Holdings

Is Le Saunda Holdings's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. In this analysis, Le Saunda Holdings's ROCE appears meaningfully below the 9.8% average reported by the Luxury industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Putting aside Le Saunda Holdings's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. It is likely that there are more attractive prospects out there.

Le Saunda Holdings's current ROCE of 1.6% is lower than its ROCE in the past, which was 17%, 3 years ago. So investors might consider if it has had issues recently.

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. ROCE is, after all, simply a snap shot of a single year. If Le Saunda Holdings is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.