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# Should You Like Golden Eagle Retail Group Limited’s (HKG:3308) High Return On Capital Employed?

Today we are going to look at Golden Eagle Retail Group Limited (HKG:3308) to see whether it might be an attractive investment prospect. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First up, we'll look at what ROCE is and how we calculate it. 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.

### What is Return On Capital Employed (ROCE)?

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. 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?

Analysts use this formula to calculate return on capital employed:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

Or for Golden Eagle Retail Group:

0.17 = CN¥2.3b ÷ (CN¥24b - CN¥10b) (Based on the trailing twelve months to December 2018.)

Therefore, Golden Eagle Retail Group has an ROCE of 17%.

### Does Golden Eagle Retail Group Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Golden Eagle Retail Group's ROCE is meaningfully better than the 4.8% average in the Multiline Retail industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of where Golden Eagle Retail Group sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

### Do Golden Eagle Retail Group's Current Liabilities Skew Its ROCE?

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that 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.

Golden Eagle Retail Group has total assets of CN¥24b and current liabilities of CN¥10b. As a result, its current liabilities are equal to approximately 43% of its total assets. Golden Eagle Retail Group has a medium level of current liabilities, which would boost the ROCE.

### What We Can Learn From Golden Eagle Retail Group's ROCE

While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. There might be better investments than Golden Eagle Retail Group 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.

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 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. Thank you for reading.