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Today we are going to look at Zhuhai Holdings Investment Group Limited (HKG:908) to see whether it might be an attractive investment prospect. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First up, we’ll look at what ROCE is and how we calculate it. 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.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. 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?
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 Zhuhai Holdings Investment Group:
0.065 = CN¥277m ÷ (CN¥13b – CN¥5.7b) (Based on the trailing twelve months to June 2018.)
Therefore, Zhuhai Holdings Investment Group has an ROCE of 6.5%.
View our latest analysis for Zhuhai Holdings Investment Group
Is Zhuhai Holdings Investment Group’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Zhuhai Holdings Investment Group’s ROCE is meaningfully higher than the 5.2% average in the Hospitality 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. Aside from the industry comparison, Zhuhai Holdings Investment Group’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
As we can see, Zhuhai Holdings Investment Group currently has an ROCE of 6.5% compared to its ROCE 3 years ago, which was 3.1%. This makes us think the business might be improving.
Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. How cyclical is Zhuhai Holdings Investment Group? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.