In This Article:
Today we are going to look at Parkson Retail Group Limited (HKG:3368) to see whether it might be an attractive investment prospect. 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. And finally, we’ll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. 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?
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 Parkson Retail Group:
0.017 = CN¥84m ÷ (CN¥12b – CN¥2.9b) (Based on the trailing twelve months to September 2018.)
Therefore, Parkson Retail Group has an ROCE of 1.7%.
See our latest analysis for Parkson Retail Group
Want to help shape the future of investing tools and platforms? Take the survey and be part of one of the most advanced studies of stock market investors to date.
Does Parkson Retail Group Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Parkson Retail Group’s ROCE appears to be significantly below the 3.7% average in the Multiline Retail industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Independently of how Parkson Retail Group compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.0% available in government bonds. Readers may wish to look for more rewarding investments.
Our data shows that Parkson Retail Group currently has an ROCE of 1.7%, compared to its ROCE of 0.06% 3 years ago. This makes us think the business might be improving.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if Parkson Retail Group has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.