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Why We’re Not Keen On Asiaray Media Group Limited’s (HKG:1993) 4.6% Return On Capital

Simply Wall St

Today we'll evaluate Asiaray Media Group Limited (HKG:1993) to determine whether it could have potential as an investment idea. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting 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. 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'.

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 Asiaray Media Group:

0.046 = HK$149m ÷ (HK$4.6b - HK$1.4b) (Based on the trailing twelve months to June 2019.)

Therefore, Asiaray Media Group has an ROCE of 4.6%.

Check out our latest analysis for Asiaray Media Group

Does Asiaray Media Group Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. In this analysis, Asiaray Media Group's ROCE appears meaningfully below the 6.8% average reported by the Media industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Putting aside Asiaray Media Group's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. It is likely that there are more attractive prospects out there.

Asiaray Media Group delivered an ROCE of 4.6%, which is better than 3 years ago, as was making losses back then. This makes us wonder if the company is improving. The image below shows how Asiaray Media Group's ROCE compares to its industry, and you can click it to see more detail on its past growth.

SEHK:1993 Past Revenue and Net Income, October 16th 2019

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. 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. If Asiaray Media Group is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

What Are Current Liabilities, And How Do They Affect Asiaray Media Group's 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 ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Asiaray Media Group has total assets of HK$4.6b and current liabilities of HK$1.4b. Therefore its current liabilities are equivalent to approximately 30% of its total assets. Asiaray Media Group has a medium level of current liabilities (boosting the ROCE somewhat), and a low ROCE.

The Bottom Line On Asiaray Media Group's ROCE

So researching other companies may be a better use of your time. You might be able to find a better investment than Asiaray Media Group. 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).

I will like Asiaray Media Group better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

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.