In This Article:
Today we’ll look at Kingland Group Holdings Limited (HKG:1751) and reflect on its potential as an investment. 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, 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.
Understanding Return On Capital Employed (ROCE)
ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the 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 Kingland Group Holdings:
0.24 = HK$30m ÷ (HK$147m – HK$23m) (Based on the trailing twelve months to June 2018.)
So, Kingland Group Holdings has an ROCE of 24%.
Check out our latest analysis for Kingland Group Holdings
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Is Kingland Group Holdings’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Kingland Group Holdings’s ROCE is meaningfully higher than the 14% average in the Construction industry. I think that’s good to see, since it implies the company is better than other companies at making the most of its capital. Putting aside its position relative to its industry for now, in absolute terms, Kingland Group Holdings’s ROCE is currently very good.
Kingland Group Holdings’s current ROCE of 24% is lower than its ROCE in the past, which was 60%, 3 years ago. Therefore we wonder if the company is facing new headwinds.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if Kingland Group Holdings has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.