Today we'll evaluate Galaxy Entertainment Group Limited (HKG:27) to determine whether it could have potential as an investment idea. 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. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. 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?
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 Galaxy Entertainment Group:
0.17 = HK$12b ÷ (HK$92b - HK$22b) (Based on the trailing twelve months to June 2019.)
So, Galaxy Entertainment Group has an ROCE of 17%.
Does Galaxy Entertainment Group Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Galaxy Entertainment Group's ROCE appears to be substantially greater than the 5.1% average in the Hospitality 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 Galaxy Entertainment Group'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 Galaxy Entertainment Group currently has an ROCE of 17%, compared to its ROCE of 11% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly. You can see in the image below how Galaxy Entertainment Group'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. 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Galaxy Entertainment Group'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. 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.
Galaxy Entertainment Group has total assets of HK$92b and current liabilities of HK$22b. As a result, its current liabilities are equal to approximately 24% of its total assets. Low current liabilities are not boosting the ROCE too much.
What We Can Learn From Galaxy Entertainment Group's ROCE
Overall, Galaxy Entertainment Group has a decent ROCE and could be worthy of further research. Galaxy Entertainment Group shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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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