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Today we’ll look at Yorkey Optical International (Cayman) Ltd. (HKG:2788) and reflect on its potential as an investment. 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. Next, we’ll compare it to others in its industry. And finally, we’ll look at how its current liabilities are impacting 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. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. 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 Yorkey Optical International (Cayman):
0.042 = US$9.0m ÷ (US$136m – US$34m) (Based on the trailing twelve months to June 2018.)
Therefore, Yorkey Optical International (Cayman) has an ROCE of 4.2%.
View our latest analysis for Yorkey Optical International (Cayman)
Is Yorkey Optical International (Cayman)’s ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Yorkey Optical International (Cayman)’s ROCE appears to be significantly below the 12% average in the Electronic industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Independently of how Yorkey Optical International (Cayman) compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.0% available in government bonds. Readers may wish to look for more rewarding investments.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. If Yorkey Optical International (Cayman) is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.