Today we'll look at Shirble Department Store Holdings (China) Limited (HKG:312) 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 up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
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 Shirble Department Store Holdings (China):
0.11 = CN¥420m ÷ (CN¥4.4b - CN¥568m) (Based on the trailing twelve months to December 2019.)
So, Shirble Department Store Holdings (China) has an ROCE of 11%.
Does Shirble Department Store Holdings (China) Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Shirble Department Store Holdings (China)'s ROCE appears to be substantially greater than the 7.7% 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. Independently of how Shirble Department Store Holdings (China) compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
Our data shows that Shirble Department Store Holdings (China) currently has an ROCE of 11%, compared to its ROCE of 3.8% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly. You can click on the image below to see (in greater detail) how Shirble Department Store Holdings (China)'s past growth compares to other companies.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If Shirble Department Store Holdings (China) is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Do Shirble Department Store Holdings (China)'s Current Liabilities Skew 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. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Shirble Department Store Holdings (China) has current liabilities of CN¥568m and total assets of CN¥4.4b. Therefore its current liabilities are equivalent to approximately 13% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.
The Bottom Line On Shirble Department Store Holdings (China)'s ROCE
Overall, Shirble Department Store Holdings (China) has a decent ROCE and could be worthy of further research. There might be better investments than Shirble Department Store Holdings (China) 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.
I will like Shirble Department Store Holdings (China) better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.