Today we’ll evaluate Glory Mark Hi-Tech (Holdings) Limited (HKG:8159) 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 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. Generally speaking a higher ROCE is better. 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’.
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 Glory Mark Hi-Tech (Holdings):
0.072 = HK$8.9m ÷ (HK$272m – HK$148m) (Based on the trailing twelve months to September 2019.)
So, Glory Mark Hi-Tech (Holdings) has an ROCE of 7.2%.
Is Glory Mark Hi-Tech (Holdings)’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. In this analysis, Glory Mark Hi-Tech (Holdings)’s ROCE appears meaningfully below the 9.9% average reported by the Electronic industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Aside from the industry comparison, Glory Mark Hi-Tech (Holdings)’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.
Glory Mark Hi-Tech (Holdings) reported an ROCE of 7.2% — better than 3 years ago, when the company didn’t make a profit. That suggests the business has returned to profitability. You can see in the image below how Glory Mark Hi-Tech (Holdings)’s ROCE compares to its industry. Click to see more on past growth.
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. ROCE is, after all, simply a snap shot of a single year. If Glory Mark Hi-Tech (Holdings) is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
How Glory Mark Hi-Tech (Holdings)’s Current Liabilities Impact Its ROCE
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.
Glory Mark Hi-Tech (Holdings) has total assets of HK$272m and current liabilities of HK$148m. As a result, its current liabilities are equal to approximately 54% of its total assets. Glory Mark Hi-Tech (Holdings)’s current liabilities are fairly high, making its ROCE look better than otherwise.
The Bottom Line On Glory Mark Hi-Tech (Holdings)’s ROCE
Despite this, the company also has a uninspiring ROCE, which is not an ideal combination in this analysis. 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.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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