In This Article:
Today we'll look at Great Harvest Maeta Group Holdings Limited (HKG:3683) and reflect on its potential as an investment. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. 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'.
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 Great Harvest Maeta Group Holdings:
0.025 = US$2.7m ÷ (US$134m - US$23m) (Based on the trailing twelve months to September 2018.)
Therefore, Great Harvest Maeta Group Holdings has an ROCE of 2.5%.
View our latest analysis for Great Harvest Maeta Group Holdings
Does Great Harvest Maeta Group Holdings Have A Good ROCE?
One way to assess ROCE is to compare similar companies. In this analysis, Great Harvest Maeta Group Holdings's ROCE appears meaningfully below the 3.3% average reported by the Shipping industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Independently of how Great Harvest Maeta Group Holdings compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.0% available in government bonds. There are potentially more appealing investments elsewhere.
Great Harvest Maeta Group Holdings has an ROCE of 2.5%, but it didn't have an ROCE 3 years ago, since it was unprofitable. That suggests the business has returned to profitability.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If Great Harvest Maeta Group Holdings is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.