In This Article:
Today we are going to look at Shun Ho Holdings Limited (HKG:253) 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, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. Finally, we’ll look at how its current liabilities affect 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?
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 Shun Ho Holdings:
0.032 = HK$261m ÷ (HK$9.7b – HK$646m) (Based on the trailing twelve months to June 2018.)
So, Shun Ho Holdings has an ROCE of 3.2%.
See our latest analysis for Shun Ho Holdings
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Is Shun Ho Holdings’s ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. In this analysis, Shun Ho Holdings’s ROCE appears meaningfully below the 5.2% average reported by the Hospitality industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Putting aside Shun Ho Holdings’s performance relative to its industry, its ROCE in absolute terms is poor – considering the risk of owning stocks compared to government bonds. It is likely that there are more attractive prospects out there.
Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. 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. How cyclical is Shun Ho Holdings? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.