Today we are going to look at AMVIG Holdings Limited (HKG:2300) 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, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
What is 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. 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.
So, How Do We Calculate ROCE?
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 AMVIG Holdings:
0.10 = HK$475m ÷ (HK$6.5b - HK$1.9b) (Based on the trailing twelve months to June 2019.)
So, AMVIG Holdings has an ROCE of 10%.
Is AMVIG Holdings's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. We can see AMVIG Holdings's ROCE is meaningfully below the Packaging industry average of 13%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Regardless of where AMVIG Holdings sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
In our analysis, AMVIG Holdings's ROCE appears to be 10%, compared to 3 years ago, when its ROCE was 7.9%. This makes us wonder if the company is improving. You can see in the image below how AMVIG Holdings's ROCE compares to its industry. Click to see more on past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is only a point-in-time measure. You can check if AMVIG Holdings has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
AMVIG Holdings's Current Liabilities And Their Impact On Its ROCE
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. 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.
AMVIG Holdings has total liabilities of HK$1.9b and total assets of HK$6.5b. Therefore its current liabilities are equivalent to approximately 30% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.
Our Take On AMVIG Holdings's ROCE
This is good to see, and with a sound ROCE, AMVIG Holdings could be worth a closer look. There might be better investments than AMVIG 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.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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 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. Thank you for reading.