Is There More To Computime Group Limited (HKG:320) Than Its 10%Returns On Capital?

Bruce Howe

Mon, Feb 4, 2019, 7:48 PM

Today we’ll evaluate Computime Group Limited (HKG:320) to determine whether it could have potential as an investment idea. 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.

First, 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.

What is Return On Capital Employed (ROCE)?

ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. 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?

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 Computime Group:

0.10 = HK$151m ÷ (HK$2.4b – HK$1.1b) (Based on the trailing twelve months to September 2018.)

Therefore, Computime Group has an ROCE of 10%.

Check out our latest analysis for Computime Group

Is Computime Group’s ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. We can see Computime Group’s ROCE is around the 12% average reported by the Electronic industry. Regardless of where Computime Group sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

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 only a point-in-time measure. If Computime Group is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

Do Computime Group’s Current Liabilities Skew Its ROCE?

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.