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Today we are going to look at Genes Tech Group Holdings Company Limited (HKG:8257) 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 up, we’ll look at what ROCE is and how we calculate it. Next, we’ll compare it to others in its industry. Then we’ll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the ‘return’ (pre-tax profit) a company generates from 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?
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 Genes Tech Group Holdings:
0.071 = NT$67m ÷ (NT$1.8b – NT$1.2b) (Based on the trailing twelve months to September 2018.)
Therefore, Genes Tech Group Holdings has an ROCE of 7.1%.
See our latest analysis for Genes Tech Group Holdings
Does Genes Tech Group Holdings Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. We can see Genes Tech Group Holdings’s ROCE is around the 6.5% average reported by the Semiconductor industry. Separate from how Genes Tech Group Holdings stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.
Genes Tech Group Holdings’s current ROCE of 7.1% is lower than its ROCE in the past, which was 18%, 3 years ago. So investors might consider if it has had issues recently.
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, after all, simply a snap shot of a single year. You can check if Genes Tech Group Holdings has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.