In This Article:
Today we are going to look at TK Group (Holdings) Limited (HKG:2283) to see whether it might be an attractive investment prospect. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. 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?
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 TK Group (Holdings):
0.23 = HK$374m ÷ (HK$2.5b - HK$842m) (Based on the trailing twelve months to June 2019.)
So, TK Group (Holdings) has an ROCE of 23%.
See our latest analysis for TK Group (Holdings)
Does TK Group (Holdings) Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that TK Group (Holdings)'s ROCE is meaningfully better than the 9.9% average in the Machinery industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the comparison to its industry for a moment, TK Group (Holdings)'s ROCE in absolute terms currently looks quite high.
We can see that, TK Group (Holdings) currently has an ROCE of 23%, less than the 31% it reported 3 years ago. So investors might consider if it has had issues recently. You can see in the image below how TK Group (Holdings)'s ROCE compares to its industry. Click to see more on past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for TK Group (Holdings).