Today we are going to look at Genes Tech Group Holdings Company Limited (HKG:8257) 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. Next, we'll compare it to others in its industry. 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. 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'.
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 Genes Tech Group Holdings:
0.23 = NT$209m ÷ (NT$2.6b - NT$1.7b) (Based on the trailing twelve months to June 2019.)
So, Genes Tech Group Holdings has an ROCE of 23%.
Is Genes Tech Group Holdings's ROCE Good?
One way to assess ROCE is to compare similar companies. Using our data, we find that Genes Tech Group Holdings's ROCE is meaningfully better than the 6.2% average in the Semiconductor industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Setting aside the comparison to its industry for a moment, Genes Tech Group Holdings's ROCE in absolute terms currently looks quite high.
Our data shows that Genes Tech Group Holdings currently has an ROCE of 23%, compared to its ROCE of 16% 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 Genes Tech Group Holdings's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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, after all, simply a snap shot of a single year. You can check if Genes Tech Group Holdings has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
How Genes Tech Group Holdings's Current Liabilities Impact Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.
Genes Tech Group Holdings has total assets of NT$2.6b and current liabilities of NT$1.7b. As a result, its current liabilities are equal to approximately 65% of its total assets. Genes Tech Group Holdings boasts an attractive ROCE, even after considering the boost from high current liabilities.
Our Take On Genes Tech Group Holdings's ROCE
In my book, this business could be worthy of further research. Genes Tech Group Holdings looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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 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. Thank you for reading.