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# Why Grand Ming Group Holdings Limited’s (HKG:1271) Return On Capital Employed Looks Uninspiring

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Today we’ll evaluate Grand Ming Group Holdings Limited (HKG:1271) 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 of all, we’ll work out how to 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.

### What is Return On Capital Employed (ROCE)?

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its 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. 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’.

### 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 Grand Ming Group Holdings:

0.035 = HK\$212m ÷ (HK\$7.1b – HK\$978m) (Based on the trailing twelve months to March 2019.)

Therefore, Grand Ming Group Holdings has an ROCE of 3.5%.

### Is Grand Ming Group Holdings’s ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, Grand Ming Group Holdings’s ROCE appears to be significantly below the 13% average in the Construction industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Putting aside Grand Ming Group Holdings’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.

As we can see, Grand Ming Group Holdings currently has an ROCE of 3.5%, less than the 4.7% it reported 3 years ago. This makes us wonder if the business is facing new challenges.

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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If Grand Ming Group Holdings is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

### What Are Current Liabilities, And How Do They Affect Grand Ming Group 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. 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.

Grand Ming Group Holdings has total liabilities of HK\$978m and total assets of HK\$7.1b. As a result, its current liabilities are equal to approximately 14% of its total assets. With a very reasonable level of current liabilities, so the impact on ROCE is fairly minimal.

### The Bottom Line On Grand Ming Group Holdings’s ROCE

Grand Ming Group Holdings has a poor ROCE, and there may be better investment prospects out there. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

I will like Grand Ming 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.