In This Article:
Today we are going to look at Telecom Service One Holdings Limited (HKG:3997) 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.
Firstly, we’ll go over how we 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.
What is Return On Capital Employed (ROCE)?
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. 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?
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 Telecom Service One Holdings:
0.12 = HK$24m ÷ (HK$104m – HK$5.4m) (Based on the trailing twelve months to September 2018.)
So, Telecom Service One Holdings has an ROCE of 12%.
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Is Telecom Service One Holdings’s ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. It appears that Telecom Service One Holdings’s ROCE is fairly close to the Commercial Services industry average of 11%. Separate from Telecom Service One Holdings’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
As we can see, Telecom Service One Holdings currently has an ROCE of 12%, less than the 47% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds.
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. If Telecom Service One Holdings is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.