Why You Should Care About China All Access (Holdings) Limited’s (HKG:633) Low Return On Capital

Today we are going to look at China All Access (Holdings) Limited (HKG:633) 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.

First, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. 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. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. 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 China All Access (Holdings):

0.071 = CN¥293m ÷ (CN¥6.4b – CN¥2.2b) (Based on the trailing twelve months to June 2018.)

Therefore, China All Access (Holdings) has an ROCE of 7.1%.

View our latest analysis for China All Access (Holdings)

Does China All Access (Holdings) Have A Good ROCE?

One way to assess ROCE is to compare similar companies. Using our data, China All Access (Holdings)’s ROCE appears to be significantly below the 14% average in the Communications industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Separate from how China All Access (Holdings) stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.

As we can see, China All Access (Holdings) currently has an ROCE of 7.1% compared to its ROCE 3 years ago, which was 0.3%. This makes us think about whether the company has been reinvesting shrewdly.

SEHK:633 Past Revenue and Net Income, March 8th 2019
SEHK:633 Past Revenue and Net Income, March 8th 2019

When considering ROCE, bear in mind that it reflects the past and does not necessarily 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 China All Access (Holdings) 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 China All Access (Holdings)’s ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

China All Access (Holdings) has total assets of CN¥6.4b and current liabilities of CN¥2.2b. As a result, its current liabilities are equal to approximately 35% of its total assets. China All Access (Holdings)’s middling level of current liabilities have the effect of boosting its ROCE a bit.

What We Can Learn From China All Access (Holdings)’s ROCE

With this level of liabilities and a mediocre ROCE, there are potentially better investments out there. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

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.