In This Article:
Today we are going to look at K & P International Holdings Limited (HKG:675) 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.
Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. 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. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'
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 K & P International Holdings:
0.012 = HK$3.6m ÷ (HK$426m - HK$128m) (Based on the trailing twelve months to December 2018.)
So, K & P International Holdings has an ROCE of 1.2%.
View our latest analysis for K & P International Holdings
Is K & P International Holdings's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, K & P International Holdings's ROCE appears to be significantly below the 9.5% average in the Electronic industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how K & P International Holdings compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.0% available in government bonds. There are potentially more appealing investments elsewhere.
K & P 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. You can click on the image below to see (in greater detail) how K & P International Holdings's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is only a point-in-time measure. If K & P International Holdings is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.