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Today we’ll look at Camsing International Holding Limited (HKG:2662) and reflect on its potential as an investment. 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. 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 amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. 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’.
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 Camsing International Holding:
0.31 = HK$157m ÷ (HK$799m – HK$292m) (Based on the trailing twelve months to June 2018.)
So, Camsing International Holding has an ROCE of 31%.
Does Camsing International Holding Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Camsing International Holding’s ROCE appears to be substantially greater than the 12% 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. Regardless of the industry comparison, in absolute terms, Camsing International Holding’s ROCE currently appears to be excellent.
Camsing International Holding reported an ROCE of 31% — better than 3 years ago, when the company didn’t make a profit. This makes us wonder if the company is improving.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. How cyclical is Camsing International Holding? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
How Camsing International Holding’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 counter this, investors can check if a company has high current liabilities relative to total assets.
Camsing International Holding has total liabilities of HK$292m and total assets of HK$799m. As a result, its current liabilities are equal to approximately 37% of its total assets. A medium level of current liabilities boosts Camsing International Holding’s ROCE somewhat.
Our Take On Camsing International Holding’s ROCE
Despite this, it reports a high ROCE, and may be worth investigating further. You might be able to find a better buy than Camsing International Holding. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.