Today we are going to look at Goldpac Group Limited (HKG:3315) to see whether it might be an attractive investment prospect. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First up, we'll look at what ROCE is and how we calculate it. 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 is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. 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?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Goldpac Group:
0.069 = CN¥137m ÷ (CN¥2.5b - CN¥531m) (Based on the trailing twelve months to June 2019.)
Therefore, Goldpac Group has an ROCE of 6.9%.
Does Goldpac Group Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Goldpac Group's ROCE is around the 6.9% average reported by the Tech industry. Setting aside the industry comparison for now, Goldpac Group's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
We can see that, Goldpac Group currently has an ROCE of 6.9%, less than the 9.7% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds. You can see in the image below how Goldpac Group's ROCE compares to its industry. Click to see more on past growth.
When considering this metric, keep in mind that it is backwards looking, and 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. If Goldpac Group is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Goldpac Group's Current Liabilities And Their Impact On Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.
Goldpac Group has total assets of CN¥2.5b and current liabilities of CN¥531m. Therefore its current liabilities are equivalent to approximately 21% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.
The Bottom Line On Goldpac Group's ROCE
With that in mind, we're not overly impressed with Goldpac Group's ROCE, so it may not be the most appealing prospect. Of course, you might also be able to find a better stock than Goldpac Group. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you are like me, then you will not want to miss this free list of growing companies that insiders are 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.