Yahoo Finance Here's What HK Asia Holdings Limited's (HKG:1723) ROCE Can Tell Us
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Today we'll evaluate HK Asia Holdings Limited (HKG:1723) to determine whether it could have potential as an investment idea. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
Firstly, we'll go over how we 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 metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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?
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 HK Asia Holdings:
0.23 = HK$34m ÷ (HK$153m - HK$4.5m) (Based on the trailing twelve months to March 2019.)
So, HK Asia Holdings has an ROCE of 23%.
See our latest analysis for HK Asia Holdings
Is HK Asia Holdings's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, HK Asia Holdings's ROCE is meaningfully higher than the 9.4% 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. Putting aside its position relative to its industry for now, in absolute terms, HK Asia Holdings's ROCE is currently very good.
HK Asia Holdings's current ROCE of 23% is lower than 3 years ago, when the company reported a 57% ROCE. This makes us wonder if the business is facing new challenges. You can see in the image below how HK Asia Holdings's ROCE compares to its industry. Click to see more on past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. ROCE is only a point-in-time measure. If HK Asia Holdings is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
HK Asia Holdings's Current Liabilities And Their Impact On Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.
HK Asia Holdings has total assets of HK$153m and current liabilities of HK$4.5m. As a result, its current liabilities are equal to approximately 2.9% of its total assets. HK Asia Holdings has low current liabilities, which have a negligible impact on its relatively good ROCE.
Our Take On HK Asia Holdings's ROCE
This suggests the company would be worth researching in more depth. There might be better investments than HK Asia Holdings out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
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.
