In This Article:
Today we are going to look at Shirble Department Store Holdings (China) Limited (HKG:312) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. 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.
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 Shirble Department Store Holdings (China):
0.074 = CN¥268m ÷ (CN¥4.2b - CN¥620m) (Based on the trailing twelve months to June 2019.)
So, Shirble Department Store Holdings (China) has an ROCE of 7.4%.
See our latest analysis for Shirble Department Store Holdings (China)
Is Shirble Department Store Holdings (China)'s ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. It appears that Shirble Department Store Holdings (China)'s ROCE is fairly close to the Multiline Retail industry average of 6.5%. Aside from the industry comparison, Shirble Department Store Holdings (China)'s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
In our analysis, Shirble Department Store Holdings (China)'s ROCE appears to be 7.4%, compared to 3 years ago, when its ROCE was 5.0%. This makes us think about whether the company has been reinvesting shrewdly. The image below shows how Shirble Department Store Holdings (China)'s ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. How cyclical is Shirble Department Store Holdings (China)? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.