Is Leeport (Holdings) Limited (HKG:387) Investing Your Capital Efficiently?
Today we’ll look at Leeport (Holdings) Limited (HKG:387) and reflect on its potential as an investment. 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.
Firstly, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. 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. 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.’
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 Leeport (Holdings):
0.021 = HK$11m ÷ (HK$984m – HK$405m) (Based on the trailing twelve months to June 2018.)
Therefore, Leeport (Holdings) has an ROCE of 2.1%.
Check out our latest analysis for Leeport (Holdings)
Is Leeport (Holdings)’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. We can see Leeport (Holdings)’s ROCE is meaningfully below the Trade Distributors industry average of 5.9%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Independently of how Leeport (Holdings) compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.0% available in government bonds. It is likely that there are more attractive prospects out there.
Leeport (Holdings)’s current ROCE of 2.1% is lower than its ROCE in the past, which was 4.8%, 3 years ago. So investors might consider if it has had issues recently.
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. How cyclical is Leeport (Holdings)? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Leeport (Holdings)’s Current Liabilities And Their Impact On 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 the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Leeport (Holdings) has total liabilities of HK$405m and total assets of HK$984m. Therefore its current liabilities are equivalent to approximately 41% of its total assets. With a medium level of current liabilities boosting the ROCE a little, Leeport (Holdings)’s low ROCE is unappealing.
Our Take On Leeport (Holdings)’s ROCE
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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.
