Today we'll look at Ever-Glory International Group, Inc. (NASDAQ:EVK) 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 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.
Understanding Return On Capital Employed (ROCE)
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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'.
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 Ever-Glory International Group:
0.074 = US$9.2m ÷ (US$285m - US$162m) (Based on the trailing twelve months to September 2019.)
So, Ever-Glory International Group has an ROCE of 7.4%.
Does Ever-Glory International Group Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. We can see Ever-Glory International Group's ROCE is meaningfully below the Luxury industry average of 11%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Separate from how Ever-Glory International Group stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.
Ever-Glory International Group's current ROCE of 7.4% is lower than its ROCE in the past, which was 12%, 3 years ago. This makes us wonder if the business is facing new challenges. The image below shows how Ever-Glory International Group's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is only a point-in-time measure. If Ever-Glory International Group is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
How Ever-Glory International Group's Current Liabilities Impact Its ROCE
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Ever-Glory International Group has total assets of US$285m and current liabilities of US$162m. As a result, its current liabilities are equal to approximately 57% of its total assets. With a high level of current liabilities, Ever-Glory International Group will experience a boost to its ROCE.
Our Take On Ever-Glory International Group's ROCE
Despite this, the company also has a uninspiring ROCE, which is not an ideal combination in this analysis. You might be able to find a better investment than Ever-Glory International Group. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
I will like Ever-Glory International Group better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
If you spot an error that warrants correction, please contact the editor at email@example.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.
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