In This Article:
Today we’ll look at Century City International Holdings Limited (HKG:355) and reflect on its potential as an investment. 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 up, we’ll look at what ROCE is and how we calculate it. 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.
What is 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. In brief, it is a useful tool, but it is not without drawbacks. 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?
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 Century City International Holdings:
0.021 = HK$792m ÷ (HK$45b – HK$6.9b) (Based on the trailing twelve months to June 2018.)
Therefore, Century City International Holdings has an ROCE of 2.1%.
View our latest analysis for Century City International Holdings
Is Century City International Holdings’s ROCE Good?
One way to assess ROCE is to compare similar companies. Using our data, Century City International Holdings’s ROCE appears to be significantly below the 5.6% average in the Hospitality industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Independently of how Century City International Holdings 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.
In our analysis, Century City International Holdings’s ROCE appears to be 2.1%, compared to 3 years ago, when its ROCE was 1.0%. This makes us think about whether the company has been reinvesting shrewdly.
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 Century City International Holdings? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.