In This Article:
Today we are going to look at Billion Industrial Holdings Limited (HKG:2299) 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. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Understanding Return On Capital Employed (ROCE)
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. 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.
So, How Do We Calculate ROCE?
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 Billion Industrial Holdings:
0.17 = CN¥1.1b ÷ (CN¥14b - CN¥7.6b) (Based on the trailing twelve months to June 2019.)
So, Billion Industrial Holdings has an ROCE of 17%.
See our latest analysis for Billion Industrial Holdings
Is Billion Industrial Holdings's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Billion Industrial Holdings's ROCE is meaningfully higher than the 9.5% average in the Luxury industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Separate from Billion Industrial Holdings's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
We can see that, Billion Industrial Holdings currently has an ROCE of 17% compared to its ROCE 3 years ago, which was 5.7%. This makes us think about whether the company has been reinvesting shrewdly. You can click on the image below to see (in greater detail) how Billion Industrial Holdings's past growth compares to other companies.
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 deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. You can check if Billion Industrial Holdings has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.