Today we are going to look at Accel Group Holdings Limited (HKG:1283) 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.
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. Last but not least, we'll look at what impact its current liabilities have on 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. Generally speaking a higher ROCE is better. 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 Accel Group Holdings:
0.62 = HK$93m ÷ (HK$225m - HK$76m) (Based on the trailing twelve months to September 2019.)
So, Accel Group Holdings has an ROCE of 62%.
Is Accel Group Holdings's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Accel Group Holdings's ROCE appears to be substantially greater than the 12% average in the Construction industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of the industry comparison, in absolute terms, Accel Group Holdings's ROCE currently appears to be excellent.
The image below shows how Accel 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. 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. You can check if Accel Group Holdings has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Accel Group Holdings's Current Liabilities And Their Impact On Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Accel Group Holdings has total liabilities of HK$76m and total assets of HK$225m. As a result, its current liabilities are equal to approximately 34% of its total assets. A medium level of current liabilities boosts Accel Group Holdings's ROCE somewhat.
Our Take On Accel Group Holdings's ROCE
Despite this, it reports a high ROCE, and may be worth investigating further. There might be better investments than Accel 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.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
If you spot an error that warrants correction, please contact the editor at email@example.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.
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