Today we'll look at Come Sure Group (Holdings) Limited (HKG:794) 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.
First, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
Understanding Return On Capital Employed (ROCE)
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. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'
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 Come Sure Group (Holdings):
0.072 = HK$47m ÷ (HK$1.2b - HK$562m) (Based on the trailing twelve months to March 2019.)
Therefore, Come Sure Group (Holdings) has an ROCE of 7.2%.
Is Come Sure Group (Holdings)'s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. We can see Come Sure Group (Holdings)'s ROCE is meaningfully below the Packaging industry average of 16%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Setting aside the industry comparison for now, Come Sure Group (Holdings)'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.
Our data shows that Come Sure Group (Holdings) currently has an ROCE of 7.2%, compared to its ROCE of 1.3% 3 years ago. This makes us wonder if the company is improving. You can see in the image below how Come Sure Group (Holdings)'s ROCE compares to its industry. Click to see more on past growth.
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 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 Come Sure Group (Holdings)? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
How Come Sure Group (Holdings)'s Current Liabilities Impact Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Come Sure Group (Holdings) has total assets of HK$1.2b and current liabilities of HK$562m. As a result, its current liabilities are equal to approximately 46% of its total assets. Come Sure Group (Holdings)'s middling level of current liabilities have the effect of boosting its ROCE a bit.
What We Can Learn From Come Sure Group (Holdings)'s ROCE
With this level of liabilities and a mediocre ROCE, there are potentially better investments out there. Of course, you might also be able to find a better stock than Come Sure Group (Holdings). So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like Come Sure Group (Holdings) better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.