In This Article:
Today we are going to look at Man Yue Technology Holdings Limited (HKG:894) 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. Next, we’ll compare it to others in its industry. And finally, we’ll look at how its current liabilities are impacting 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. 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?
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 Man Yue Technology Holdings:
0.052 = HK$81m ÷ (HK$2.7b – HK$1.1b) (Based on the trailing twelve months to June 2018.)
Therefore, Man Yue Technology Holdings has an ROCE of 5.2%.
See our latest analysis for Man Yue Technology Holdings
Does Man Yue Technology Holdings Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. We can see Man Yue Technology Holdings’s ROCE is meaningfully below the Electronic industry average of 11%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Aside from the industry comparison, Man Yue Technology Holdings’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.
Man Yue Technology Holdings delivered an ROCE of 5.2%, which is better than 3 years ago, as was making losses back then. This makes us wonder if the company is improving.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If Man Yue Technology Holdings is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.