Today we are going to look at Hengxing Gold Holding Company Limited (HKG:2303) 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 up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect 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. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
How Do You Calculate Return On Capital Employed?
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 Hengxing Gold Holding:
0.27 = CN¥255m ÷ (CN¥1.1b - CN¥183m) (Based on the trailing twelve months to June 2019.)
So, Hengxing Gold Holding has an ROCE of 27%.
Does Hengxing Gold Holding Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, Hengxing Gold Holding's ROCE is meaningfully higher than the 7.8% average in the Metals and Mining 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, Hengxing Gold Holding's ROCE in absolute terms currently looks quite high.
In our analysis, Hengxing Gold Holding's ROCE appears to be 27%, compared to 3 years ago, when its ROCE was 18%. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how Hengxing Gold Holding's past growth compares to other companies.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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 only a point-in-time measure. Remember that most companies like Hengxing Gold Holding are cyclical businesses. If Hengxing Gold Holding is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Hengxing Gold Holding's Current Liabilities And Their Impact On 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 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.
Hengxing Gold Holding has total assets of CN¥1.1b and current liabilities of CN¥183m. As a result, its current liabilities are equal to approximately 16% of its total assets. A minimal amount of current liabilities limits the impact on ROCE.
Our Take On Hengxing Gold Holding's ROCE
This is good to see, and with such a high ROCE, Hengxing Gold Holding may be worth a closer look. Hengxing Gold Holding 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.
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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