Yahoo Finance Should You Worry About Yorkey Optical International (Cayman) Ltd.’s (HKG:2788) ROCE?
Today we are going to look at Yorkey Optical International (Cayman) Ltd. (HKG:2788) to see whether it might be an attractive investment prospect. 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. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
Understanding Return On Capital Employed (ROCE)
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. 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.
How Do You Calculate Return On Capital Employed?
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 Yorkey Optical International (Cayman):
0.041 = US$3.7m ÷ (US$125m - US$34m) (Based on the trailing twelve months to June 2019.)
So, Yorkey Optical International (Cayman) has an ROCE of 4.1%.
See our latest analysis for Yorkey Optical International (Cayman)
Is Yorkey Optical International (Cayman)'s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. We can see Yorkey Optical International (Cayman)'s ROCE is meaningfully below the Electronic industry average of 9.9%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how Yorkey Optical International (Cayman) stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). It is likely that there are more attractive prospects out there.
The image below shows how Yorkey Optical International (Cayman)'s ROCE compares to its industry, and you can click it to see more detail on its 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If Yorkey Optical International (Cayman) is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
How Yorkey Optical International (Cayman)'s Current Liabilities Impact Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Yorkey Optical International (Cayman) has total assets of US$125m and current liabilities of US$34m. Therefore its current liabilities are equivalent to approximately 28% of its total assets. This is a modest level of current liabilities, which will have a limited impact on the ROCE.
Our Take On Yorkey Optical International (Cayman)'s ROCE
Yorkey Optical International (Cayman) has a poor ROCE, and there may be better investment prospects out there. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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.
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. Thank you for reading.
