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Today we'll look at World-Link Logistics (Asia) Holding Limited (HKG:6083) and reflect on its potential as an investment. 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.
First of all, we'll work out how to 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.
What is Return On Capital Employed (ROCE)?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. 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'.
How Do You Calculate Return On Capital Employed?
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 World-Link Logistics (Asia) Holding:
0.15 = HK$14m ÷ (HK$111m - HK$18m) (Based on the trailing twelve months to December 2018.)
So, World-Link Logistics (Asia) Holding has an ROCE of 15%.
Check out our latest analysis for World-Link Logistics (Asia) Holding
Is World-Link Logistics (Asia) Holding's ROCE Good?
One way to assess ROCE is to compare similar companies. World-Link Logistics (Asia) Holding's ROCE appears to be substantially greater than the 5.6% average in the Logistics industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where World-Link Logistics (Asia) Holding sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
World-Link Logistics (Asia) Holding's current ROCE of 15% is lower than its ROCE in the past, which was 24%, 3 years ago. Therefore we wonder if the company is facing new headwinds.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. You can check if World-Link Logistics (Asia) Holding has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.