Don’t Buy Jiyi Household International Holdings Limited (HKG:1495) Until You Understand Its ROCE

Today we’ll look at Jiyi Household International Holdings Limited (HKG:1495) and reflect on its potential as an investment. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. 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 metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its 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.’

How Do You Calculate Return On Capital Employed?

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 Jiyi Household International Holdings:

0.057 = CN¥28m ÷ (CN¥736m – CN¥246m) (Based on the trailing twelve months to December 2018.)

Therefore, Jiyi Household International Holdings has an ROCE of 5.7%.

Check out our latest analysis for Jiyi Household International Holdings

Is Jiyi Household International Holdings’s ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. We can see Jiyi Household International Holdings’s ROCE is around the 5.6% average reported by the Trade Distributors industry. Separate from how Jiyi Household International Holdings stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.

As we can see, Jiyi Household International Holdings currently has an ROCE of 5.7%, less than the 26% it reported 3 years ago. This makes us wonder if the business is facing new challenges.

SEHK:1495 Past Revenue and Net Income, April 16th 2019
SEHK:1495 Past Revenue and Net Income, April 16th 2019

Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. 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 Jiyi Household International Holdings has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

Jiyi Household International Holdings’s Current Liabilities And Their Impact On Its ROCE

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Jiyi Household International Holdings has total liabilities of CN¥246m and total assets of CN¥736m. As a result, its current liabilities are equal to approximately 33% of its total assets. Jiyi Household International Holdings’s ROCE is improved somewhat by its moderate amount of current liabilities.

What We Can Learn From Jiyi Household International Holdings’s ROCE

Unfortunately, its ROCE is still uninspiring, and there are potentially more attractive 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.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.