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Today we'll look at HF Foods Group Inc. (NASDAQ:HFFG) and reflect on its potential as an investment. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. 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 is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. 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 HF Foods Group:
0.21 = US$10m ÷ (US$82m - US$34m) (Based on the trailing twelve months to December 2018.)
Therefore, HF Foods Group has an ROCE of 21%.
Does HF Foods Group Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. HF Foods Group's ROCE appears to be substantially greater than the 9.9% average in the Consumer Retailing 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, HF Foods Group's ROCE is currently very good.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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. You can check if HF Foods Group has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
How HF Foods Group's Current Liabilities Impact 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.
HF Foods Group has total assets of US$82m and current liabilities of US$34m. As a result, its current liabilities are equal to approximately 41% of its total assets. HF Foods Group has a medium level of current liabilities, boosting its ROCE somewhat.
Our Take On HF Foods Group's ROCE
Even so, it has a great ROCE, and could be an attractive prospect for further research. You might be able to find a better buy than HF Foods Group. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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 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. Thank you for reading.