Is Oriental Press Group Limited (HKG:18) Struggling With Its 4.8% Return On Capital Employed?

Today we are going to look at Oriental Press Group Limited (HKG:18) to see whether it might be an attractive investment prospect. 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. 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. 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.

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 Oriental Press Group:

0.048 = HK$92m ÷ (HK$2.0b – HK$86m) (Based on the trailing twelve months to March 2019.)

So, Oriental Press Group has an ROCE of 4.8%.

Check out our latest analysis for Oriental Press Group

Does Oriental Press Group Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. We can see Oriental Press Group’s ROCE is meaningfully below the Media industry average of 6.8%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how Oriental Press Group compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.0% available in government bonds. It is likely that there are more attractive prospects out there.

In our analysis, Oriental Press Group’s ROCE appears to be 4.8%, compared to 3 years ago, when its ROCE was 1.5%. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how Oriental Press Group’s past growth compares to other companies.

SEHK:18 Past Revenue and Net Income, October 28th 2019
SEHK:18 Past Revenue and Net Income, October 28th 2019

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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 Oriental Press Group has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

Do Oriental Press Group’s Current Liabilities Skew Its 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Oriental Press Group has total assets of HK$2.0b and current liabilities of HK$86m. As a result, its current liabilities are equal to approximately 4.3% of its total assets. Oriental Press Group has very few current liabilities, which have a minimal effect on its already low ROCE.

Our Take On Oriental Press Group’s ROCE

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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.