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Today we'll look at Wai Kee Holdings Limited (HKG:610) and reflect on its potential as an investment. 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. Next, we'll compare it to others in its industry. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. 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 Wai Kee Holdings:
0.038 = HK$352m ÷ (HK$13b - HK$3.5b) (Based on the trailing twelve months to December 2018.)
So, Wai Kee Holdings has an ROCE of 3.8%.
View our latest analysis for Wai Kee Holdings
Is Wai Kee Holdings's ROCE Good?
One way to assess ROCE is to compare similar companies. Using our data, Wai Kee Holdings's ROCE appears to be significantly below the 13% average in the Construction industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Putting aside Wai Kee 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.
Our data shows that Wai Kee Holdings currently has an ROCE of 3.8%, compared to its ROCE of 1.3% 3 years ago. This makes us think the business might be improving. You can see in the image below how Wai Kee Holdings's ROCE compares to its industry. Click to see more on past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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. How cyclical is Wai Kee Holdings? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.