Is Kumpulan H & L High-Tech Berhad (KLSE:HIGHTEC) Investing Your Capital Efficiently?

Today we are going to look at Kumpulan H & L High-Tech Berhad (KLSE:HIGHTEC) 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. And finally, we'll look at how its current liabilities are impacting its ROCE.

What is 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. Overall, it is a valuable metric that has its flaws. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.

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 Kumpulan H & L High-Tech Berhad:

0.04 = RM4.5m ÷ (RM115m - RM3.6m) (Based on the trailing twelve months to January 2020.)

Therefore, Kumpulan H & L High-Tech Berhad has an ROCE of 4.0%.

See our latest analysis for Kumpulan H & L High-Tech Berhad

Does Kumpulan H & L High-Tech Berhad Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. In this analysis, Kumpulan H & L High-Tech Berhad's ROCE appears meaningfully below the 10% average reported by the Machinery industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Putting aside Kumpulan H & L High-Tech Berhad's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. There are potentially more appealing investments elsewhere.

Our data shows that Kumpulan H & L High-Tech Berhad currently has an ROCE of 4.0%, compared to its ROCE of 3.1% 3 years ago. This makes us wonder if the company is improving. You can see in the image below how Kumpulan H & L High-Tech Berhad's ROCE compares to its industry. Click to see more on past growth.

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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, after all, simply a snap shot of a single year. How cyclical is Kumpulan H & L High-Tech Berhad? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

What Are Current Liabilities, And How Do They Affect Kumpulan H & L High-Tech Berhad's ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Kumpulan H & L High-Tech Berhad has total assets of RM115m and current liabilities of RM3.6m. As a result, its current liabilities are equal to approximately 3.1% of its total assets. With barely any current liabilities, there is minimal impact on Kumpulan H & L High-Tech Berhad's admittedly low ROCE.

Our Take On Kumpulan H & L High-Tech Berhad's ROCE

Still, investors could probably find more attractive prospects with better performance out there. You might be able to find a better investment than Kumpulan H & L High-Tech Berhad. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.