In This Article:
Today we are going to look at North Asia Strategic Holdings Limited (HKG:8080) 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. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. 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 North Asia Strategic Holdings:
0.16 = HK$155m ÷ (HK$1.9b - HK$885m) (Based on the trailing twelve months to December 2018.)
Therefore, North Asia Strategic Holdings has an ROCE of 16%.
View our latest analysis for North Asia Strategic Holdings
Does North Asia Strategic Holdings Have A Good ROCE?
One way to assess ROCE is to compare similar companies. North Asia Strategic Holdings's ROCE appears to be substantially greater than the 5.6% average in the Trade Distributors industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Separate from North Asia Strategic Holdings's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
In our analysis, North Asia Strategic Holdings's ROCE appears to be 16%, compared to 3 years ago, when its ROCE was 3.5%. This makes us think about whether the company has been reinvesting shrewdly.
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, after all, simply a snap shot of a single year. If North Asia Strategic Holdings is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.