In This Article:
Today we are going to look at Datronix Holdings Limited (HKG:889) to see whether it might be an attractive investment prospect. 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.
First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. 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?
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 Datronix Holdings:
0.041 = HK$37m ÷ (HK$947m - HK$26m) (Based on the trailing twelve months to December 2018.)
So, Datronix Holdings has an ROCE of 4.1%.
Check out our latest analysis for Datronix Holdings
Is Datronix Holdings's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, Datronix Holdings's ROCE appears to be significantly below the 9.7% average in the Electronic industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how Datronix Holdings compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.0% available in government bonds. Readers may wish to look for more rewarding investments.
In our analysis, Datronix Holdings's ROCE appears to be 4.1%, compared to 3 years ago, when its ROCE was 1.9%. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how Datronix Holdings's past growth compares to other companies.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if Datronix Holdings has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.