Why We Like China Goldjoy Group Limited’s (HKG:1282) 11% Return On Capital Employed

Brandy Kinsey

Wed, Feb 13, 2019, 5:13 PM

Today we are going to look at China Goldjoy Group Limited (HKG:1282) to see whether it might be an attractive investment prospect. 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.

Firstly, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE measures the amount of pre-tax profits a company can generate from the capital employed 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. 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 China Goldjoy Group:

0.11 = HK$630m ÷ (HK$12b – HK$4.4b) (Based on the trailing twelve months to June 2018.)

Therefore, China Goldjoy Group has an ROCE of 11%.

See our latest analysis for China Goldjoy Group

Does China Goldjoy Group Have A Good ROCE?

One way to assess ROCE is to compare similar companies. Using our data, we find that China Goldjoy Group’s ROCE is meaningfully better than the 5.7% average in the Tech industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Independently of how China Goldjoy Group compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

China Goldjoy Group delivered an ROCE of 11%, which is better than 3 years ago, as was making losses back then. That implies the business has been improving.

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. If China Goldjoy Group is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.