In This Article:
Today we are going to look at Zengame Technology Holding Limited (HKG:2660) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Understanding Return On Capital Employed (ROCE)
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. 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?
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 Zengame Technology Holding:
0.24 = CN¥130m ÷ (CN¥613m - CN¥62m) (Based on the trailing twelve months to June 2019.)
So, Zengame Technology Holding has an ROCE of 24%.
View our latest analysis for Zengame Technology Holding
Is Zengame Technology Holding's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Zengame Technology Holding's ROCE is meaningfully better than the 14% average in the Entertainment industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of the industry comparison, in absolute terms, Zengame Technology Holding's ROCE currently appears to be excellent.
The image below shows how Zengame Technology Holding'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. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. You can check if Zengame Technology Holding has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
How Zengame Technology Holding's Current Liabilities Impact Its ROCE
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.