Today we'll evaluate Regina Miracle International (Holdings) Limited (HKG:2199) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting 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. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. 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 Regina Miracle International (Holdings):
0.066 = HK$370m ÷ (HK$7.4b - HK$1.9b) (Based on the trailing twelve months to September 2019.)
So, Regina Miracle International (Holdings) has an ROCE of 6.6%.
Is Regina Miracle International (Holdings)'s ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Regina Miracle International (Holdings)'s ROCE is meaningfully below the Luxury industry average of 9.6%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Separate from how Regina Miracle International (Holdings) stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.
Regina Miracle International (Holdings)'s current ROCE of 6.6% is lower than 3 years ago, when the company reported a 12% ROCE. This makes us wonder if the business is facing new challenges. The image below shows how Regina Miracle 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 deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for Regina Miracle International (Holdings).
What Are Current Liabilities, And How Do They Affect Regina Miracle International (Holdings)'s ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Regina Miracle International (Holdings) has total assets of HK$7.4b and current liabilities of HK$1.9b. As a result, its current liabilities are equal to approximately 25% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.
The Bottom Line On Regina Miracle International (Holdings)'s ROCE
If Regina Miracle International (Holdings) continues to earn an uninspiring ROCE, there may be better places to invest. Of course, you might also be able to find a better stock than Regina Miracle International (Holdings). So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
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.