Today we’ll evaluate Camsing International Holding Limited (HKG:2662) to determine whether it could have potential as an investment idea. In particular, we’ll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First up, we’ll look at what ROCE is and how we calculate it. Then we’ll compare its ROCE to similar companies. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its 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.’
So, How Do We Calculate ROCE?
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 Camsing International Holding:
0.31 = HK$157m ÷ (HK$799m – HK$292m) (Based on the trailing twelve months to June 2018.)
So, Camsing International Holding has an ROCE of 31%.
Check out our latest analysis for Camsing International Holding
Want to help shape the future of investing tools and platforms? Take the survey and be part of one of the most advanced studies of stock market investors to date.
Is Camsing International Holding’s ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, Camsing International Holding’s ROCE is meaningfully higher than the 12% average in the Electronic industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Putting aside its position relative to its industry for now, in absolute terms, Camsing International Holding’s ROCE is currently very good.
Camsing International Holding reported an ROCE of 31% — better than 3 years ago, when the company didn’t make a profit. This makes us wonder if the company is improving.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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 Camsing International Holding has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.