Today we are going to look at Shirble Department Store Holdings (China) Limited (HKG:312) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE 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. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. 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 Shirble Department Store Holdings (China):
0.074 = CN¥268m ÷ (CN¥4.2b - CN¥620m) (Based on the trailing twelve months to June 2019.)
So, Shirble Department Store Holdings (China) has an ROCE of 7.4%.
Is Shirble Department Store Holdings (China)'s ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. It appears that Shirble Department Store Holdings (China)'s ROCE is fairly close to the Multiline Retail industry average of 6.5%. Aside from the industry comparison, Shirble Department Store Holdings (China)'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.
In our analysis, Shirble Department Store Holdings (China)'s ROCE appears to be 7.4%, compared to 3 years ago, when its ROCE was 5.0%. This makes us think about whether the company has been reinvesting shrewdly. The image below shows how Shirble Department Store Holdings (China)'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. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. How cyclical is Shirble Department Store Holdings (China)? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
How Shirble Department Store Holdings (China)'s Current Liabilities Impact Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Shirble Department Store Holdings (China) has total liabilities of CN¥620m and total assets of CN¥4.2b. Therefore its current liabilities are equivalent to approximately 15% of its total assets. It is good to see a restrained amount of current liabilities, as this limits the effect on ROCE.
Our Take On Shirble Department Store Holdings (China)'s ROCE
If Shirble Department Store Holdings (China) continues to earn an uninspiring ROCE, there may be better places to invest. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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.
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. Thank you for reading.