Today we'll evaluate Intron Technology Holdings Limited (HKG:1760) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting 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. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. 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'.
How Do You Calculate Return On Capital Employed?
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 Intron Technology Holdings:
0.18 = CN¥217m ÷ (CN¥2.2b - CN¥1.0b) (Based on the trailing twelve months to June 2019.)
Therefore, Intron Technology Holdings has an ROCE of 18%.
Is Intron Technology Holdings's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Intron Technology Holdings's ROCE is meaningfully higher than the 11% average in the Auto Components 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. Separate from Intron Technology Holdings's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
We can see that, Intron Technology Holdings currently has an ROCE of 18%, less than the 42% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds. The image below shows how Intron Technology Holdings's ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Intron Technology Holdings.
How Intron Technology Holdings's Current Liabilities Impact Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Intron Technology Holdings has total assets of CN¥2.2b and current liabilities of CN¥1.0b. As a result, its current liabilities are equal to approximately 47% of its total assets. Intron Technology Holdings has a medium level of current liabilities, which would boost the ROCE.
What We Can Learn From Intron Technology Holdings's ROCE
While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. Intron Technology Holdings 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.
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 firstname.lastname@example.org. 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.