Today we are going to look at Green Future Food Hydrocolloid Marine Science Company Limited (HKG:1084) 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, we'll go over how we 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 is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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'.
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 Green Future Food Hydrocolloid Marine Science:
0.30 = HK$175m ÷ (HK$1.0b - HK$420m) (Based on the trailing twelve months to March 2019.)
So, Green Future Food Hydrocolloid Marine Science has an ROCE of 30%.
Does Green Future Food Hydrocolloid Marine Science Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Green Future Food Hydrocolloid Marine Science's ROCE appears to be substantially greater than the 11% average in the Chemicals 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, Green Future Food Hydrocolloid Marine Science's ROCE in absolute terms currently looks quite high.
The image below shows how Green Future Food Hydrocolloid Marine Science's ROCE compares to its industry, and you can click it to see more detail on its past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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, after all, simply a snap shot of a single year. If Green Future Food Hydrocolloid Marine Science is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Green Future Food Hydrocolloid Marine Science's Current Liabilities And Their Impact On 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Green Future Food Hydrocolloid Marine Science has total assets of HK$1.0b and current liabilities of HK$420m. Therefore its current liabilities are equivalent to approximately 42% of its total assets. Green Future Food Hydrocolloid Marine Science's ROCE is boosted somewhat by its middling amount of current liabilities.
Our Take On Green Future Food Hydrocolloid Marine Science's ROCE
Even so, it has a great ROCE, and could be an attractive prospect for further research. Green Future Food Hydrocolloid Marine Science shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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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