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Today we are going to look at Fulum Group Holdings Limited (HKG:1443) to see whether it might be an attractive investment prospect. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
Firstly, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. 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.’
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 Fulum Group Holdings:
0.057 = HK$57m ÷ (HK$1.2b – HK$194m) (Based on the trailing twelve months to September 2018.)
Therefore, Fulum Group Holdings has an ROCE of 5.7%.
View our latest analysis for Fulum Group Holdings
Is Fulum Group Holdings’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. We can see Fulum Group Holdings’s ROCE is around the 5.2% average reported by the Hospitality industry. Setting aside the industry comparison for now, Fulum Group Holdings’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
Fulum Group Holdings’s current ROCE of 5.7% is lower than 3 years ago, when the company reported a 20% ROCE. So investors might consider if it has had issues recently.
When considering this metric, keep in mind that it is backwards looking, and 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. You can check if Fulum Group Holdings has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Fulum Group Holdings’s Current Liabilities And Their Impact On Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.