In This Article:
Today we are going to look at Baguio Green Group Limited (HKG:1397) to see whether it might be an attractive investment prospect. 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 up, we'll look at what ROCE is and how we calculate it. 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 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. 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 Baguio Green Group:
0.09 = HK$25m ÷ (HK$698m - HK$423m) (Based on the trailing twelve months to December 2018.)
Therefore, Baguio Green Group has an ROCE of 9.0%.
Check out our latest analysis for Baguio Green Group
Is Baguio Green Group's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Baguio Green Group's ROCE appears to be around the 10.0% average of the Commercial Services industry. Setting aside the industry comparison for now, Baguio Green Group's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.
Baguio Green Group's current ROCE of 9.0% is lower than 3 years ago, when the company reported a 14% ROCE. This makes us wonder if the business is facing new challenges. You can click on the image below to see (in greater detail) how Baguio Green Group's past growth compares to other companies.
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. ROCE is, after all, simply a snap shot of a single year. How cyclical is Baguio Green Group? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.