In This Article:
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Today we’ll look at Yangtzekiang Garment Limited (HKG:294) 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 up, we’ll look at what ROCE is and how we calculate it. Next, we’ll compare it to others in its industry. Finally, we’ll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
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?
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 Yangtzekiang Garment:
0.008 = HK$12m ÷ (HK$1.3b – HK$131m) (Based on the trailing twelve months to September 2018.)
Therefore, Yangtzekiang Garment has an ROCE of 0.8%.
View our latest analysis for Yangtzekiang Garment
Is Yangtzekiang Garment’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. In this analysis, Yangtzekiang Garment’s ROCE appears meaningfully below the 9.4% average reported by the Luxury industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how Yangtzekiang Garment 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.
As we can see, Yangtzekiang Garment currently has an ROCE of 0.8% compared to its ROCE 3 years ago, which was 0.5%. This makes us think the business might be improving.
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. ROCE is only a point-in-time measure. How cyclical is Yangtzekiang Garment? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.