In This Article:
Today we'll evaluate Yeebo (International Holdings) Limited (HKG:259) 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 up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting 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. All else being equal, a better business will have a higher ROCE. 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.
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 Yeebo (International Holdings):
0.019 = HK$34m ÷ (HK$2.2b - HK$383m) (Based on the trailing twelve months to September 2019.)
So, Yeebo (International Holdings) has an ROCE of 1.9%.
Check out our latest analysis for Yeebo (International Holdings)
Does Yeebo (International Holdings) Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. We can see Yeebo (International Holdings)'s ROCE is meaningfully below the Electronic industry average of 9.7%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Putting aside Yeebo (International 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.
Yeebo (International Holdings)'s current ROCE of 1.9% is lower than 3 years ago, when the company reported a 2.5% ROCE. Therefore we wonder if the company is facing new headwinds. You can see in the image below how Yeebo (International Holdings)'s ROCE compares to its industry. Click to see more on past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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. How cyclical is Yeebo (International Holdings)? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.