In This Article:
Today we are going to look at Doumob (HKG:1917) 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.
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 measures the amount of pre-tax profits a company can generate from the capital employed 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?
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 Doumob:
0.19 = CN¥60m ÷ (CN¥351m - CN¥38m) (Based on the trailing twelve months to June 2019.)
Therefore, Doumob has an ROCE of 19%.
Check out our latest analysis for Doumob
Is Doumob's ROCE Good?
One way to assess ROCE is to compare similar companies. Doumob's ROCE appears to be substantially greater than the 14% average in the Interactive Media and Services industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Independently of how Doumob compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
Doumob's current ROCE of 19% is lower than 3 years ago, when the company reported a 37% ROCE. This makes us wonder if the business is facing new challenges. The image below shows how Doumob's ROCE compares to its industry, and you can click it to see more detail on its past growth.
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 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. How cyclical is Doumob? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Doumob's Current Liabilities And Their Impact On Its ROCE
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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 counteract this, we check if a company has high current liabilities, relative to its total assets.