Advertisement
U.S. markets open in 46 minutes
  • S&P Futures

    5,307.75
    -0.50 (-0.01%)
     
  • Dow Futures

    40,161.00
    +17.00 (+0.04%)
     
  • Nasdaq Futures

    18,501.25
    -2.50 (-0.01%)
     
  • Russell 2000 Futures

    2,141.10
    +2.70 (+0.13%)
     
  • Crude Oil

    82.67
    +1.32 (+1.62%)
     
  • Gold

    2,230.00
    +17.30 (+0.78%)
     
  • Silver

    24.70
    -0.05 (-0.19%)
     
  • EUR/USD

    1.0798
    -0.0032 (-0.29%)
     
  • 10-Yr Bond

    4.2300
    +0.0340 (+0.81%)
     
  • Vix

    13.00
    +0.22 (+1.72%)
     
  • dólar/libra

    1.2629
    -0.0009 (-0.07%)
     
  • USD/JPY

    151.2750
    +0.0290 (+0.02%)
     
  • Bitcoin USD

    70,511.01
    +452.42 (+0.65%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • FTSE 100

    7,949.46
    +17.48 (+0.22%)
     
  • Nikkei 225

    40,168.07
    -594.66 (-1.46%)
     

Why We Like Morris Holdings Limited’s (HKG:1575) 36% Return On Capital Employed

Today we are going to look at Morris Holdings Limited (HKG:1575) to see whether it might be an attractive investment prospect. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

Firstly, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. 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. Ultimately, it is a useful but imperfect metric. 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?

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 Morris Holdings:

0.36 = CN¥198m ÷ (CN¥1.2b – CN¥645m) (Based on the trailing twelve months to June 2018.)

So, Morris Holdings has an ROCE of 36%.

View our latest analysis for Morris Holdings

Is Morris Holdings’s ROCE Good?

One way to assess ROCE is to compare similar companies. In our analysis, Morris Holdings’s ROCE is meaningfully higher than the 9.8% average in the Consumer Durables industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Setting aside the comparison to its industry for a moment, Morris Holdings’s ROCE in absolute terms currently looks quite high.

SEHK:1575 Past Revenue and Net Income, March 5th 2019
SEHK:1575 Past Revenue and Net Income, March 5th 2019

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Morris Holdings.

Do Morris 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Morris Holdings has total assets of CN¥1.2b and current liabilities of CN¥645m. As a result, its current liabilities are equal to approximately 52% of its total assets. While a high level of current liabilities boosts its ROCE, Morris Holdings’s returns are still very good.

The Bottom Line On Morris Holdings’s ROCE

So to us, the company is potentially worth investigating further. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.

Advertisement