Why Bosideng International Holdings Limited’s (HKG:3998) Return On Capital Employed Is Impressive
Today we'll look at Bosideng International Holdings Limited (HKG:3998) 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.
First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect 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. 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.
So, How Do We Calculate ROCE?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Bosideng International Holdings:
0.15 = CN¥1.6b ÷ (CN¥16b - CN¥6.0b) (Based on the trailing twelve months to September 2019.)
Therefore, Bosideng International Holdings has an ROCE of 15%.
Check out our latest analysis for Bosideng International Holdings
Is Bosideng International Holdings's ROCE Good?
One way to assess ROCE is to compare similar companies. Bosideng International Holdings's ROCE appears to be substantially greater than the 9.6% average in the Luxury industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Separate from Bosideng International Holdings's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Our data shows that Bosideng International Holdings currently has an ROCE of 15%, compared to its ROCE of 5.9% 3 years ago. This makes us wonder if the company is improving. You can see in the image below how Bosideng International Holdings's ROCE compares to its industry. Click to see more on past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Bosideng International Holdings.
Bosideng International 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 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.
Bosideng International Holdings has total liabilities of CN¥6.0b and total assets of CN¥16b. As a result, its current liabilities are equal to approximately 37% of its total assets. Bosideng International Holdings has a middling amount of current liabilities, increasing its ROCE somewhat.
Our Take On Bosideng International Holdings's ROCE
Bosideng International Holdings's ROCE does look good, but the level of current liabilities also contribute to that. Bosideng International Holdings looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
There are plenty of other companies that have insiders buying up shares. You probably do 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 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.
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.
