How Do Sun Hing Vision Group Holdings Limited’s (HKG:125) Returns Compare To Its Industry?
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Today we are going to look at Sun Hing Vision Group Holdings Limited (HKG:125) to see whether it might be an attractive investment prospect. 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.
Firstly, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. And finally, we’ll look at how its current liabilities are impacting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. 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?
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 Sun Hing Vision Group Holdings:
0.07 = HK$66m ÷ (HK$1.2b – HK$284m) (Based on the trailing twelve months to September 2018.)
Therefore, Sun Hing Vision Group Holdings has an ROCE of 7.0%.
See our latest analysis for Sun Hing Vision Group Holdings
Does Sun Hing Vision Group Holdings Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. In this analysis, Sun Hing Vision Group Holdings’s ROCE appears meaningfully below the 9.4% average reported by the Luxury industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Setting aside the industry comparison for now, Sun Hing Vision Group Holdings’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
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 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. You can check if Sun Hing Vision Group Holdings has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Sun Hing Vision Group Holdings’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.
Sun Hing Vision Group Holdings has total liabilities of HK$284m and total assets of HK$1.2b. As a result, its current liabilities are equal to approximately 23% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.
What We Can Learn From Sun Hing Vision Group Holdings’s ROCE
With that in mind, we’re not overly impressed with Sun Hing Vision Group Holdings’s ROCE, so it may not be the most appealing prospect. Of course you might be able to find a better stock than Sun Hing Vision Group Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like Sun Hing Vision Group Holdings better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, 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 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.
