U.S. Markets open in 5 hrs 9 mins

Why Health and Happiness (H&H) International Holdings Limited’s (HKG:1112) Return On Capital Employed Is Impressive

Simply Wall St

Today we'll evaluate Health and Happiness (H&H) International Holdings Limited (HKG:1112) to determine whether it could have potential as an investment idea. 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 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 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. 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'.

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 Health and Happiness (H&H) International Holdings:

0.18 = CN¥2.2b ÷ (CN¥16b - CN¥3.3b) (Based on the trailing twelve months to June 2019.)

Therefore, Health and Happiness (H&H) International Holdings has an ROCE of 18%.

See our latest analysis for Health and Happiness (H&H) International Holdings

Does Health and Happiness (H&H) International Holdings Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Health and Happiness (H&H) International Holdings's ROCE is meaningfully better than the 10% average in the Food industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where Health and Happiness (H&H) International 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, Health and Happiness (H&H) International Holdings's ROCE appears to be 18%, compared to 3 years ago, when its ROCE was 12%. This makes us wonder if the company is improving. The image below shows how Health and Happiness (H&H) International Holdings's ROCE compares to its industry, and you can click it to see more detail on its past growth.

SEHK:1112 Past Revenue and Net Income, January 9th 2020

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

How Health and Happiness (H&H) International Holdings's Current Liabilities Impact Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Health and Happiness (H&H) International Holdings has total assets of CN¥16b and current liabilities of CN¥3.3b. As a result, its current liabilities are equal to approximately 21% of its total assets. Low current liabilities are not boosting the ROCE too much.

The Bottom Line On Health and Happiness (H&H) International Holdings's ROCE

This is good to see, and with a sound ROCE, Health and Happiness (H&H) International Holdings could be worth a closer look. There might be better investments than Health and Happiness (H&H) International 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.

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.