In This Article:
Today we’ll evaluate Phoenix Media Investment (Holdings) Limited (HKG:2008) to determine whether it could have potential as an investment idea. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
Firstly, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Then we’ll determine how its current liabilities are affecting 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. In general, businesses with a higher ROCE are usually better quality. 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’.
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 Phoenix Media Investment (Holdings):
0.017 = HK$402m ÷ (HK$11b – HK$2.5b) (Based on the trailing twelve months to June 2018.)
Therefore, Phoenix Media Investment (Holdings) has an ROCE of 1.7%.
Check out our latest analysis for Phoenix Media Investment (Holdings)
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Does Phoenix Media Investment (Holdings) Have A Good ROCE?
One way to assess ROCE is to compare similar companies. We can see Phoenix Media Investment (Holdings)’s ROCE is meaningfully below the Media industry average of 11%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Putting aside Phoenix Media Investment (Holdings)’s performance relative to its industry, its ROCE in absolute terms is poor – considering the risk of owning stocks compared to government bonds. It is likely that there are more attractive prospects out there.
Phoenix Media Investment (Holdings)’s current ROCE of 1.7% is lower than 3 years ago, when the company reported a 6.5% ROCE. This makes us wonder if the business is facing new challenges.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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. How cyclical is Phoenix Media Investment (Holdings)? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.