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i-Control Holdings Limited (HKG:1402) Is Employing Capital Very Effectively

Simply Wall St

Today we are going to look at i-Control Holdings Limited (HKG:1402) to see whether it might be an attractive investment prospect. 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 of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. 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 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. 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 i-Control Holdings:

0.25 = HK$34m ÷ (HK$205m - HK$65m) (Based on the trailing twelve months to September 2019.)

So, i-Control Holdings has an ROCE of 25%.

Check out our latest analysis for i-Control Holdings

Is i-Control Holdings's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. i-Control Holdings's ROCE appears to be substantially greater than the 11% average in the IT industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Putting aside its position relative to its industry for now, in absolute terms, i-Control Holdings's ROCE is currently very good.

Our data shows that i-Control Holdings currently has an ROCE of 25%, compared to its ROCE of 10% 3 years ago. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how i-Control Holdings's past growth compares to other companies.

SEHK:1402 Past Revenue and Net Income, February 4th 2020

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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 i-Control Holdings is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

Do i-Control Holdings's Current Liabilities Skew Its ROCE?

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

i-Control Holdings has current liabilities of HK$65m and total assets of HK$205m. As a result, its current liabilities are equal to approximately 32% of its total assets. i-Control Holdings's ROCE is boosted somewhat by its middling amount of current liabilities.

The Bottom Line On i-Control Holdings's ROCE

Even so, it has a great ROCE, and could be an attractive prospect for further research. There might be better investments than i-Control Holdings out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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.

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. Thank you for reading.