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Here's What Winox Holdings Limited's (HKG:6838) ROCE Can Tell Us

Simply Wall St

Today we are going to look at Winox Holdings Limited (HKG:6838) 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 of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. 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 Winox Holdings:

0.22 = HK$161m ÷ (HK$925m - HK$208m) (Based on the trailing twelve months to June 2019.)

Therefore, Winox Holdings has an ROCE of 22%.

View our latest analysis for Winox Holdings

Does Winox Holdings Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Winox Holdings's ROCE is meaningfully better than the 9.6% average in the Luxury industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Putting aside its position relative to its industry for now, in absolute terms, Winox Holdings's ROCE is currently very good.

Our data shows that Winox Holdings currently has an ROCE of 22%, compared to its ROCE of 13% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly. The image below shows how Winox Holdings's ROCE compares to its industry, and you can click it to see more detail on its past growth.

SEHK:6838 Past Revenue and Net Income, December 6th 2019

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. ROCE is only a point-in-time measure. How cyclical is Winox Holdings? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

Winox Holdings'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. 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.

Winox Holdings has total liabilities of HK$208m and total assets of HK$925m. Therefore its current liabilities are equivalent to approximately 22% of its total assets. The fairly low level of current liabilities won't have much impact on the already great ROCE.

What We Can Learn From Winox Holdings's ROCE

With low current liabilities and a high ROCE, Winox Holdings could be worthy of further investigation. There might be better investments than Winox Holdings 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.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.

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. Thank you for reading.