Are Ever Sunshine Lifestyle Services Group Limited’s (HKG:1995) High Returns Really That Great?

Today we’ll evaluate Ever Sunshine Lifestyle Services Group Limited (HKG:1995) to determine whether it could have potential as an investment idea. In particular, we’ll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

First, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. 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 Ever Sunshine Lifestyle Services Group:

0.18 = CN¥196m ÷ (CN¥1.8b – CN¥744m) (Based on the trailing twelve months to June 2019.)

So, Ever Sunshine Lifestyle Services Group has an ROCE of 18%.

Check out our latest analysis for Ever Sunshine Lifestyle Services Group

Does Ever Sunshine Lifestyle Services Group Have A Good ROCE?

One way to assess ROCE is to compare similar companies. Using our data, we find that Ever Sunshine Lifestyle Services Group’s ROCE is meaningfully better than the 11% average in the Commercial Services 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. Separate from Ever Sunshine Lifestyle Services Group’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

The image below shows how Ever Sunshine Lifestyle Services Group’s ROCE compares to its industry, and you can click it to see more detail on its past growth.

SEHK:1995 Past Revenue and Net Income, January 25th 2020
SEHK:1995 Past Revenue and Net Income, January 25th 2020

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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Ever Sunshine Lifestyle Services Group.

Ever Sunshine Lifestyle Services Group’s Current Liabilities And Their Impact On Its ROCE

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Ever Sunshine Lifestyle Services Group has total liabilities of CN¥744m and total assets of CN¥1.8b. As a result, its current liabilities are equal to approximately 41% of its total assets. Ever Sunshine Lifestyle Services Group has a middling amount of current liabilities, increasing its ROCE somewhat.

The Bottom Line On Ever Sunshine Lifestyle Services Group’s ROCE

With a decent ROCE, the company could be interesting, but remember that the level of current liabilities make the ROCE look better. There might be better investments than Ever Sunshine Lifestyle Services Group out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

I will like Ever Sunshine Lifestyle Services Group better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

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