Is Wong’s Kong King International (Holdings) Limited’s (HKG:532) Capital Allocation Ability Worth Your Time?

Today we’ll look at Wong’s Kong King International (Holdings) Limited (HKG:532) and reflect on its potential as an investment. 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. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.

Return On Capital Employed (ROCE): What is it?

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. 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 Wong’s Kong King International (Holdings):

0.081 = HK$136m ÷ (HK$3.5b – HK$1.9b) (Based on the trailing twelve months to December 2018.)

So, Wong’s Kong King International (Holdings) has an ROCE of 8.1%.

See our latest analysis for Wong’s Kong King International (Holdings)

Is Wong’s Kong King International (Holdings)’s ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. We can see Wong’s Kong King International (Holdings)’s ROCE is around the 9.7% average reported by the Electronic industry. Aside from the industry comparison, Wong’s Kong King International (Holdings)’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.

In our analysis, Wong’s Kong King International (Holdings)’s ROCE appears to be 8.1%, compared to 3 years ago, when its ROCE was 5.8%. This makes us think the business might be improving.

SEHK:532 Past Revenue and Net Income, July 31st 2019
SEHK:532 Past Revenue and Net Income, July 31st 2019

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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 only a point-in-time measure. You can check if Wong’s Kong King International (Holdings) has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

What Are Current Liabilities, And How Do They Affect Wong’s Kong King International (Holdings)’s ROCE?

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Wong’s Kong King International (Holdings) has total assets of HK$3.5b and current liabilities of HK$1.9b. As a result, its current liabilities are equal to approximately 52% of its total assets. With a high level of current liabilities, Wong’s Kong King International (Holdings) will experience a boost to its ROCE.

What We Can Learn From Wong’s Kong King International (Holdings)’s ROCE

Despite this, the company also has a uninspiring ROCE, which is not an ideal combination in this analysis. You might be able to find a better investment than Wong’s Kong King International (Holdings). 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 are like me, then you will not want to miss this free list of growing companies that insiders are 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.