Here’s What Build King Holdings Limited’s (HKG:240) ROCE Can Tell Us

Today we are going to look at Build King Holdings Limited (HKG:240) to see whether it might be an attractive investment prospect. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the ‘return’ (pre-tax profit) a company generates from 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. 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 Build King Holdings:

0.47 = HK$521m ÷ (HK$4.3b – HK$3.2b) (Based on the trailing twelve months to December 2018.)

Therefore, Build King Holdings has an ROCE of 47%.

See our latest analysis for Build King Holdings

Is Build King Holdings’s ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Build King Holdings’s ROCE is meaningfully better than the 13% average in the Construction industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Setting aside the comparison to its industry for a moment, Build King Holdings’s ROCE in absolute terms currently looks quite high.

As we can see, Build King Holdings currently has an ROCE of 47% compared to its ROCE 3 years ago, which was 17%. This makes us wonder if the company is improving.

SEHK:240 Past Revenue and Net Income, April 26th 2019
SEHK:240 Past Revenue and Net Income, April 26th 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. How cyclical is Build King Holdings? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

Do Build King Holdings’s Current Liabilities Skew Its 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Build King Holdings has total liabilities of HK$3.2b and total assets of HK$4.3b. As a result, its current liabilities are equal to approximately 74% of its total assets. Build King Holdings’s high level of current liabilities boost the ROCE – but its ROCE is still impressive.

Our Take On Build King Holdings’s ROCE

So we would be interested in doing more research here — there may be an opportunity! There might be better investments than Build King 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 Build King 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.