In This Article:
Today we are going to look at Skyworth Group Limited (HKG:751) 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 up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
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 Skyworth Group:
0.029 = CN¥603m ÷ (CN¥45b - CN¥24b) (Based on the trailing twelve months to December 2018.)
Therefore, Skyworth Group has an ROCE of 2.9%.
View our latest analysis for Skyworth Group
Is Skyworth Group's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. We can see Skyworth Group's ROCE is meaningfully below the Consumer Durables industry average of 8.7%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Regardless of how Skyworth Group stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). It is likely that there are more attractive prospects out there.
Skyworth Group's current ROCE of 2.9% is lower than 3 years ago, when the company reported a 8.8% ROCE. Therefore we wonder if the company is facing new headwinds. You can click on the image below to see (in greater detail) how Skyworth Group's past growth compares to other companies.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Skyworth Group.