Kingland Group Holdings Limited (HKG:1751) Is Employing Capital Very Effectively
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Today we'll evaluate Kingland Group Holdings Limited (HKG:1751) to determine whether it could have potential as an investment idea. 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, we'll go over how we 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.
Understanding Return On Capital Employed (ROCE)
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. 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'.
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 Kingland Group Holdings:
0.19 = HK$25m ÷ (HK$148m - HK$18m) (Based on the trailing twelve months to December 2018.)
Therefore, Kingland Group Holdings has an ROCE of 19%.
View our latest analysis for Kingland Group Holdings
Is Kingland Group Holdings's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Kingland Group Holdings's ROCE is meaningfully better than the 13% average in the Construction 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 Kingland Group Holdings compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
We can see that , Kingland Group Holdings currently has an ROCE of 19%, less than the 51% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds. The image below shows how Kingland Group Holdings's ROCE compares to its industry, and you can click it to see more detail on its past growth.
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 Kingland Group Holdings? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Do Kingland Group Holdings'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. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Kingland Group Holdings has total assets of HK$148m and current liabilities of HK$18m. Therefore its current liabilities are equivalent to approximately 12% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.
What We Can Learn From Kingland Group Holdings's ROCE
Overall, Kingland Group Holdings has a decent ROCE and could be worthy of further research. There might be better investments than Kingland Group 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.
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 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. Thank you for reading.
