In This Article:
Today we’ll evaluate Most Kwai Chung Limited (HKG:1716) to determine whether it could have potential as an investment idea. 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.
Return On Capital Employed (ROCE): What is it?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. 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 Most Kwai Chung:
0.25 = HK$28m ÷ (HK$104m – HK$11m) (Based on the trailing twelve months to September 2018.)
Therefore, Most Kwai Chung has an ROCE of 25%.
Check out our latest analysis for Most Kwai Chung
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Does Most Kwai Chung Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, Most Kwai Chung’s ROCE is meaningfully higher than the 11% average in the Media industry. I think that’s good to see, since it implies the company is better than other companies at making the most of its capital. Setting aside the comparison to its industry for a moment, Most Kwai Chung’s ROCE in absolute terms currently looks quite high.
As we can see, Most Kwai Chung currently has an ROCE of 25%, less than the 79% it reported 3 years ago. So investors might consider if it has had issues recently.
Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. How cyclical is Most Kwai Chung? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.