In This Article:
Today we'll look at Raymond Industrial Limited (HKG:229) and reflect on its potential as an investment. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First up, we'll look at what ROCE is and how we calculate it. 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 is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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 Raymond Industrial:
0.086 = HK$54m ÷ (HK$793m - HK$167m) (Based on the trailing twelve months to March 2019.)
So, Raymond Industrial has an ROCE of 8.6%.
View our latest analysis for Raymond Industrial
Does Raymond Industrial Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Raymond Industrial's ROCE appears to be around the 10% average of the Consumer Durables industry. Setting aside the industry comparison for now, Raymond Industrial'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.
We can see that , Raymond Industrial currently has an ROCE of 8.6% compared to its ROCE 3 years ago, which was 6.1%. This makes us think about whether the company has been reinvesting shrewdly. You can click on the image below to see (in greater detail) how Raymond Industrial's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is 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, after all, simply a snap shot of a single year. How cyclical is Raymond Industrial? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.