HB Global Limited (KLSE:HBGLOB) Earns Among The Best Returns In Its Industry

Today we'll look at HB Global Limited (KLSE:HBGLOB) 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. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting 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. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.

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 HB Global:

0.069 = CN¥25m ÷ (CN¥481m - CN¥118m) (Based on the trailing twelve months to December 2019.)

Therefore, HB Global has an ROCE of 6.9%.

Check out our latest analysis for HB Global

Does HB Global Have A Good ROCE?

One way to assess ROCE is to compare similar companies. HB Global's ROCE appears to be substantially greater than the 5.4% average in the Food industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the industry comparison for now, HB Global's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.

HB Global reported an ROCE of 6.9% -- 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 HB Global's ROCE compares to its industry. Click to see more on past growth.

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 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. You can check if HB Global has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

HB Global's Current Liabilities And Their Impact On 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

HB Global has current liabilities of CN¥118m and total assets of CN¥481m. As a result, its current liabilities are equal to approximately 24% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.

The Bottom Line On HB Global's ROCE

With that in mind, we're not overly impressed with HB Global's ROCE, so it may not be the most appealing prospect. Of course, you might also be able to find a better stock than HB Global. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.