In This Article:
Today we’ll evaluate Ulferts International Limited (HKG:1711) to determine whether it could have potential as an investment idea. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First up, we’ll look at what ROCE is and how we calculate it. 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 measures the amount of pre-tax profits a company can generate from the capital employed in its 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’.
So, How Do We Calculate ROCE?
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 Ulferts International:
0.033 = HK$11m ÷ (HK$165m – HK$52m) (Based on the trailing twelve months to September 2018.)
So, Ulferts International has an ROCE of 3.3%.
Check out our latest analysis for Ulferts International
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Does Ulferts International Have A Good ROCE?
One way to assess ROCE is to compare similar companies. In this analysis, Ulferts International’s ROCE appears meaningfully below the 13% average reported by the Specialty Retail industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Putting aside Ulferts International’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.
Ulferts International’s current ROCE of 3.3% is lower than its ROCE in the past, which was 66%, 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, after all, simply a snap shot of a single year. If Ulferts International is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.