How Do Come Sure Group (Holdings) Limited’s (HKG:794) Returns On Capital Compare To Peers?

Today we are going to look at Come Sure Group (Holdings) Limited (HKG:794) to see whether it might be an attractive investment prospect. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

Firstly, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared 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. Generally speaking a higher ROCE is better. 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?

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 Come Sure Group (Holdings):

0.072 = HK$47m ÷ (HK$1.2b – HK$562m) (Based on the trailing twelve months to March 2019.)

So, Come Sure Group (Holdings) has an ROCE of 7.2%.

Check out our latest analysis for Come Sure Group (Holdings)

Does Come Sure Group (Holdings) Have A Good ROCE?

One way to assess ROCE is to compare similar companies. In this analysis, Come Sure Group (Holdings)’s ROCE appears meaningfully below the 16% average reported by the Packaging industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Aside from the industry comparison, Come Sure Group (Holdings)’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.

Our data shows that Come Sure Group (Holdings) currently has an ROCE of 7.2%, compared to its ROCE of 1.3% 3 years ago. This makes us think the business might be improving.

SEHK:794 Past Revenue and Net Income, August 22nd 2019
SEHK:794 Past Revenue and Net Income, August 22nd 2019

It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. You can check if Come Sure Group (Holdings) has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

Come Sure Group (Holdings)’s Current Liabilities And Their Impact On Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.

Come Sure Group (Holdings) has total liabilities of HK$562m and total assets of HK$1.2b. As a result, its current liabilities are equal to approximately 46% of its total assets. Come Sure Group (Holdings)’s ROCE is improved somewhat by its moderate amount of current liabilities.

The Bottom Line On Come Sure Group (Holdings)’s ROCE

Despite this, its ROCE is still mediocre, and you may find more appealing investments elsewhere. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

I will like Come Sure Group (Holdings) better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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. Thank you for reading.