Should You Worry About Meilleure Health International Industry Group Limited’s (HKG:2327) ROCE?

Mary Ramos

Wed, Feb 13, 2019, 7:42 PM

Today we’ll look at Meilleure Health International Industry Group Limited (HKG:2327) 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. 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. Generally speaking a higher ROCE is better. 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 Meilleure Health International Industry Group:

0.024 = HK$16m ÷ (HK$1.2b – HK$270m) (Based on the trailing twelve months to June 2018.)

Therefore, Meilleure Health International Industry Group has an ROCE of 2.4%.

See our latest analysis for Meilleure Health International Industry Group

Does Meilleure Health International Industry Group Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. We can see Meilleure Health International Industry Group’s ROCE is meaningfully below the Trade Distributors industry average of 6.0%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Putting aside Meilleure Health International Industry Group’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 Meilleure Health International Industry Group currently has an ROCE of 2.4%, compared to its ROCE of 0.3% 3 years ago. This makes us wonder if the company is improving.

It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. How cyclical is Meilleure Health International Industry Group? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.