Today we'll evaluate Keck Seng Investments (Hong Kong) Limited (HKG:184) to determine whether it could have potential as an investment idea. 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. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting 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. All else being equal, a better business will have a higher ROCE. 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.
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 Keck Seng Investments (Hong Kong):
0.049 = HK$287m ÷ (HK$6.9b - HK$966m) (Based on the trailing twelve months to June 2019.)
So, Keck Seng Investments (Hong Kong) has an ROCE of 4.9%.
Does Keck Seng Investments (Hong Kong) Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. It appears that Keck Seng Investments (Hong Kong)'s ROCE is fairly close to the Hospitality industry average of 5.0%. Putting aside Keck Seng Investments (Hong Kong)'s performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. Readers may wish to look for more rewarding investments.
You can see in the image below how Keck Seng Investments (Hong Kong)'s ROCE compares to its industry. Click to see more on past growth.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if Keck Seng Investments (Hong Kong) has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
How Keck Seng Investments (Hong Kong)'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. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.
Keck Seng Investments (Hong Kong) has total liabilities of HK$966m and total assets of HK$6.9b. As a result, its current liabilities are equal to approximately 14% of its total assets. This is a modest level of current liabilities, which will have a limited impact on the ROCE.
What We Can Learn From Keck Seng Investments (Hong Kong)'s ROCE
Keck Seng Investments (Hong Kong) has a poor ROCE, and there may be better investment prospects out there. Of course, you might also be able to find a better stock than Keck Seng Investments (Hong Kong). So you may wish to see this free collection of other companies that have grown earnings strongly.
Keck Seng Investments (Hong Kong) is not the only stock insiders are buying. So take a peek at this free list of growing companies with insider buying.
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.