In This Article:
Today we'll look at Oriental Payment Group Holdings Limited (HKG:8613) and reflect on its potential as an investment. 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. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its 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.
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 Oriental Payment Group Holdings:
0.037 = HK$3.4m ÷ (HK$111m - HK$20m) (Based on the trailing twelve months to December 2019.)
So, Oriental Payment Group Holdings has an ROCE of 3.7%.
Check out our latest analysis for Oriental Payment Group Holdings
Is Oriental Payment Group Holdings's ROCE Good?
One way to assess ROCE is to compare similar companies. We can see Oriental Payment Group Holdings's ROCE is meaningfully below the IT industry average of 11%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Independently of how Oriental Payment Group 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.
Oriental Payment Group Holdings's current ROCE of 3.7% is lower than its ROCE in the past, which was 68%, 3 years ago. So investors might consider if it has had issues recently. The image below shows how Oriental Payment Group Holdings's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if Oriental Payment Group Holdings has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.