Why AAC Technologies Holdings Inc.’s (HKG:2018) Return On Capital Employed Is Impressive

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Today we are going to look at AAC Technologies Holdings Inc. (HKG:2018) to see whether it might be an attractive investment prospect. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First of all, we’ll work out how to calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.

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

ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the 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. 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?

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 AAC Technologies Holdings:

0.17 = CN¥3.6b ÷ (CN¥30b – CN¥8.3b) (Based on the trailing twelve months to March 2019.)

Therefore, AAC Technologies Holdings has an ROCE of 17%.

See our latest analysis for AAC Technologies Holdings

Is AAC Technologies Holdings’s ROCE Good?

One way to assess ROCE is to compare similar companies. Using our data, we find that AAC Technologies Holdings’s ROCE is meaningfully better than the 9.7% average in the Electronic industry. I think that’s good to see, since it implies the company is better than other companies at making the most of its capital. Independently of how AAC Technologies Holdings compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

AAC Technologies Holdings’s current ROCE of 17% is lower than its ROCE in the past, which was 27%, 3 years ago. So investors might consider if it has had issues recently.

SEHK:2018 Past Revenue and Net Income, July 17th 2019
SEHK:2018 Past Revenue and Net Income, July 17th 2019

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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

What Are Current Liabilities, And How Do They Affect AAC Technologies Holdings’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 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 counter this, investors can check if a company has high current liabilities relative to total assets.

AAC Technologies Holdings has total liabilities of CN¥8.3b and total assets of CN¥30b. Therefore its current liabilities are equivalent to approximately 28% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.

What We Can Learn From AAC Technologies Holdings’s ROCE

With that in mind, AAC Technologies Holdings’s ROCE appears pretty good. AAC Technologies Holdings 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.

I will like AAC Technologies 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.