Today we are going to look at Jiyi Household International Holdings Limited (HKG:1495) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the 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. 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?
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 Jiyi Household International Holdings:
0.052 = CN¥32m ÷ (CN¥874m - CN¥261m) (Based on the trailing twelve months to June 2019.)
So, Jiyi Household International Holdings has an ROCE of 5.2%.
Does Jiyi Household International Holdings Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Jiyi Household International Holdings's ROCE appears to be significantly below the 7.6% average in the Trade Distributors industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Setting aside the industry comparison for now, Jiyi Household International Holdings's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
Jiyi Household International Holdings's current ROCE of 5.2% is lower than 3 years ago, when the company reported a 20% ROCE. So investors might consider if it has had issues recently. The image below shows how Jiyi Household International Holdings's ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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. If Jiyi Household International Holdings is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Do Jiyi Household International Holdings's Current Liabilities Skew 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.
Jiyi Household International Holdings has total liabilities of CN¥261m and total assets of CN¥874m. Therefore its current liabilities are equivalent to approximately 30% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.
Our Take On Jiyi Household International Holdings's ROCE
With that in mind, we're not overly impressed with Jiyi Household International Holdings's ROCE, so it may not be the most appealing prospect. You might be able to find a better investment than Jiyi Household International Holdings. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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 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.
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