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Today we'll look at Ozner Water International Holding Limited (HKG:2014) and reflect on its potential as an investment. 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 of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Understanding 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. 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'.
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 Ozner Water International Holding:
0.087 = CN¥378m ÷ (CN¥6.6b - CN¥2.2b) (Based on the trailing twelve months to December 2018.)
Therefore, Ozner Water International Holding has an ROCE of 8.7%.
View our latest analysis for Ozner Water International Holding
Does Ozner Water International Holding Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, Ozner Water International Holding's ROCE appears to be around the 8.7% average of the Consumer Durables industry. Separate from how Ozner Water International Holding stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.
In our analysis, Ozner Water International Holding's ROCE appears to be 8.7%, compared to 3 years ago, when its ROCE was 5.7%. 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 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Ozner Water International Holding.