Is Shirble Department Store Holdings (China) Limited’s (HKG:312) 11% ROCE Any Good?

Today we'll evaluate Shirble Department Store Holdings (China) Limited (HKG:312) to determine whether it could have potential as an investment idea. 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.

First, we'll go over how we 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.

Understanding Return On Capital Employed (ROCE)

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. Ultimately, it is a useful but imperfect metric. 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 Shirble Department Store Holdings (China):

0.11 = CN¥420m ÷ (CN¥4.4b - CN¥568m) (Based on the trailing twelve months to December 2019.)

So, Shirble Department Store Holdings (China) has an ROCE of 11%.

Check out our latest analysis for Shirble Department Store Holdings (China)

Does Shirble Department Store Holdings (China) Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Shirble Department Store Holdings (China)'s ROCE is meaningfully higher than the 7.7% average in the Multiline Retail industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Independently of how Shirble Department Store Holdings (China) compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

In our analysis, Shirble Department Store Holdings (China)'s ROCE appears to be 11%, compared to 3 years ago, when its ROCE was 3.8%. This makes us wonder if the company is improving. You can see in the image below how Shirble Department Store Holdings (China)'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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If Shirble Department Store Holdings (China) is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

What Are Current Liabilities, And How Do They Affect Shirble Department Store Holdings (China)'s ROCE?

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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.

Shirble Department Store Holdings (China) has total assets of CN¥4.4b and current liabilities of CN¥568m. As a result, its current liabilities are equal to approximately 13% of its total assets. Low current liabilities are not boosting the ROCE too much.

Our Take On Shirble Department Store Holdings (China)'s ROCE

With that in mind, Shirble Department Store Holdings (China)'s ROCE appears pretty good. Shirble Department Store Holdings (China) looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.

I will like Shirble Department Store Holdings (China) better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.