How Do Deson Development International Holdings Limited’s (HKG:262) Returns On Capital Compare To Peers?

Dane Simmons

Sun, Feb 10, 2019, 5:06 PM

Today we’ll evaluate Deson Development International Holdings Limited (HKG:262) to determine whether it could have potential as an investment idea. In particular, we’ll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its 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. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. 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 Deson Development International Holdings:

0.012 = -HK$20.4m ÷ (HK$2.5b – HK$390m) (Based on the trailing twelve months to September 2018.)

So, Deson Development International Holdings has an ROCE of 1.2%.

Check out our latest analysis for Deson Development International Holdings

Does Deson Development International Holdings Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. We can see Deson Development International Holdings’s ROCE is meaningfully below the Construction industry average of 14%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Independently of how Deson Development International 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.

Deson Development International Holdings delivered an ROCE of 1.2%, which is better than 3 years ago, as was making losses back then. That suggests the business has returned to profitability.

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 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. How cyclical is Deson Development International Holdings? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.