Today we'll evaluate Hang Yick Holdings Company Limited (HKG:1894) to determine whether it could have potential as an investment idea. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First of all, we'll work out how to 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. Generally speaking a higher ROCE is better. 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?
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 Hang Yick Holdings:
0.11 = HK$27m ÷ (HK$315m - HK$68m) (Based on the trailing twelve months to September 2019.)
Therefore, Hang Yick Holdings has an ROCE of 11%.
Does Hang Yick Holdings Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. It appears that Hang Yick Holdings's ROCE is fairly close to the Construction industry average of 12%. Separate from Hang Yick Holdings's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Hang Yick Holdings's current ROCE of 11% is lower than 3 years ago, when the company reported a 63% ROCE. Therefore we wonder if the company is facing new headwinds. You can see in the image below how Hang Yick Holdings's ROCE compares to its industry. Click to see more on past growth.
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 Hang Yick Holdings has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
How Hang Yick Holdings's Current Liabilities Impact 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. 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.
Hang Yick Holdings has total assets of HK$315m and current liabilities of HK$68m. As a result, its current liabilities are equal to approximately 22% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.
The Bottom Line On Hang Yick Holdings's ROCE
Overall, Hang Yick Holdings has a decent ROCE and could be worthy of further research. There might be better investments than Hang Yick Holdings out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
I will like Hang Yick 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.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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