Today we’ll evaluate Chow Sang Sang Holdings International Limited (HKG:116) 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. Next, we’ll compare it to others in its industry. Finally, we’ll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
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 Chow Sang Sang Holdings International:
0.12 = HK$1.4b ÷ (HK$16b – HK$3.7b) (Based on the trailing twelve months to June 2019.)
So, Chow Sang Sang Holdings International has an ROCE of 12%.
View our latest analysis for Chow Sang Sang Holdings International
Does Chow Sang Sang Holdings International Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Using our data, we find that Chow Sang Sang Holdings International’s ROCE is meaningfully better than the 9.6% average in the Luxury industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Independently of how Chow Sang Sang Holdings International compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
You can click on the image below to see (in greater detail) how Chow Sang Sang Holdings International’s past growth compares to other companies.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Chow Sang Sang Holdings International.
How Chow Sang Sang Holdings International’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. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Chow Sang Sang Holdings International has total liabilities of HK$3.7b and total assets of HK$16b. As a result, its current liabilities are equal to approximately 24% of its total assets. Low current liabilities are not boosting the ROCE too much.
The Bottom Line On Chow Sang Sang Holdings International’s ROCE
With that in mind, Chow Sang Sang Holdings International’s ROCE appears pretty good. Chow Sang Sang Holdings International shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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.
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