Today we'll evaluate Golden Eagle Retail Group Limited (HKG:3308) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect 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. Overall, it is a valuable metric that has its flaws. 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?
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 Golden Eagle Retail Group:
0.17 = CN¥2.4b ÷ (CN¥23b - CN¥9.2b) (Based on the trailing twelve months to June 2019.)
So, Golden Eagle Retail Group has an ROCE of 17%.
Check out our latest analysis for Golden Eagle Retail Group
Does Golden Eagle Retail Group Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Golden Eagle Retail Group's ROCE appears to be substantially greater than the 6.1% average in the Multiline Retail industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Separate from Golden Eagle Retail Group's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Our data shows that Golden Eagle Retail Group currently has an ROCE of 17%, compared to its ROCE of 9.3% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly. The image below shows how Golden Eagle Retail Group's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.