Here’s What Golden Eagle Retail Group Limited’s (HKG:3308) ROCE Can Tell Us

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Today we are going to look at Golden Eagle Retail Group Limited (HKG:3308) to see whether it might be an attractive investment prospect. 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. And finally, we’ll look at how its current liabilities are impacting its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that ‘one dollar invested in the company generates value of more than one dollar’.

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 Golden Eagle Retail Group:

0.17 = CN¥2.3b ÷ (CN¥24b – CN¥10b) (Based on the trailing twelve months to December 2018.)

So, Golden Eagle Retail Group has an ROCE of 17%.

View our latest analysis for Golden Eagle Retail Group

Does Golden Eagle Retail Group Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, Golden Eagle Retail Group’s ROCE is meaningfully higher than the 7.5% average in the Multiline Retail industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from Golden Eagle Retail Group’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

SEHK:3308 Past Revenue and Net Income, July 12th 2019
SEHK:3308 Past Revenue and Net Income, July 12th 2019

It is important to remember that ROCE shows past performance, and is 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 Golden Eagle Retail Group.

How Golden Eagle Retail Group’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 the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Golden Eagle Retail Group has total liabilities of CN¥10b and total assets of CN¥24b. Therefore its current liabilities are equivalent to approximately 43% of its total assets. With this level of current liabilities, Golden Eagle Retail Group’s ROCE is boosted somewhat.

The Bottom Line On Golden Eagle Retail Group’s ROCE

While its ROCE looks good, it’s worth remembering that the current liabilities are making the business look better. There might be better investments than Golden Eagle Retail Group 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.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.