Today we’ll look at Jiyi Household International Holdings Limited (HKG:1495) 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.
Firstly, we’ll go over how we 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 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. In the end, ROCE 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 Jiyi Household International Holdings:
0.059 = CN¥21m ÷ (CN¥546m – CN¥204m) (Based on the trailing twelve months to June 2018.)
So, Jiyi Household International Holdings has an ROCE of 5.9%.
Is Jiyi Household International Holdings’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, Jiyi Household International Holdings’s ROCE appears to be around the 6.0% average of the Trade Distributors industry. Separate from how Jiyi Household International Holdings stacks up against its industry, its ROCE in absolute terms is mediocre; not much better than the returns on government bonds. Investors may wish to consider higher-performing investments.
As we can see, Jiyi Household International Holdings currently has an ROCE of 5.9%, less than the 30% it reported 3 years ago. This makes us wonder if the business is facing new challenges.
It is important to remember that ROCE shows past performance, and is 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, after all, simply a snap shot of a single year. If Jiyi Household International Holdings is cyclical, it could make sense to check out 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 are short term bills and invoices that need to be paid in 12 months or less. 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) 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¥204m and total assets of CN¥546m. As a result, its current liabilities are equal to approximately 37% of its total assets. Jiyi Household International Holdings’s ROCE is improved somewhat by its moderate amount of current liabilities.
Our Take On Jiyi Household International Holdings’s ROCE
With this level of liabilities and a mediocre ROCE, there are potentially better investments out there. A good or bad ROCE tells us something about a business, but we need to do more research before making a purchase. For example, I often check if insiders have been buying shares .
Of course Jiyi Household International Holdings may not be the best stock to buy. So you may wish to see this free collection of other companies that have high ROE and low debt.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.