U.S. Markets open in 6 mins

Why Crystal International Group Limited’s (HKG:2232) Return On Capital Employed Is Impressive

Simply Wall St

Today we are going to look at Crystal International Group Limited (HKG:2232) to see whether it might be an attractive investment prospect. 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. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. 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 Crystal International Group:

0.16 = US$174m ÷ (US$1.9b - US$802m) (Based on the trailing twelve months to June 2019.)

Therefore, Crystal International Group has an ROCE of 16%.

Check out our latest analysis for Crystal International Group

Does Crystal International Group Have A Good ROCE?

One way to assess ROCE is to compare similar companies. In our analysis, Crystal International Group's ROCE is meaningfully higher 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 Crystal International Group's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

Crystal International Group's current ROCE of 16% is lower than 3 years ago, when the company reported a 23% ROCE. Therefore we wonder if the company is facing new headwinds. You can see in the image below how Crystal International Group's ROCE compares to its industry. Click to see more on past growth.

SEHK:2232 Past Revenue and Net Income, November 4th 2019

When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Crystal International Group.

How Crystal International Group'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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Crystal International Group has total liabilities of US$802m and total assets of US$1.9b. Therefore its current liabilities are equivalent to approximately 43% of its total assets. Crystal International Group has a medium level of current liabilities, which would boost the ROCE.

What We Can Learn From Crystal International Group's ROCE

While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. Crystal International Group 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.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.