In This Article:
Today we are going to look at Kader Holdings Company Limited (HKG:180) 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 of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. 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'.
How Do You Calculate Return On Capital Employed?
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 Kader Holdings:
0.027 = HK$63m ÷ (HK$2.7b - HK$411m) (Based on the trailing twelve months to December 2018.)
Therefore, Kader Holdings has an ROCE of 2.7%.
See our latest analysis for Kader Holdings
Does Kader Holdings Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Kader Holdings's ROCE is meaningfully below the Leisure industry average of 9.6%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Putting aside Kader Holdings's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. It is likely that there are more attractive prospects out there.
Kader Holdings's current ROCE of 2.7% is lower than its ROCE in the past, which was 6.7%, 3 years ago. So investors might consider if it has had issues recently. The image below shows how Kader Holdings's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if Kader Holdings has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.