Win Hanverky Holdings Limited (HKG:3322) Might Not Be A Great Investment
Today we'll evaluate Win Hanverky Holdings Limited (HKG:3322) to determine whether it could have potential as an investment idea. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed 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?
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 Win Hanverky Holdings:
0.028 = HK$62m ÷ (HK$3.4b - HK$1.2b) (Based on the trailing twelve months to December 2018.)
Therefore, Win Hanverky Holdings has an ROCE of 2.8%.
See our latest analysis for Win Hanverky Holdings
Is Win Hanverky Holdings's ROCE Good?
One way to assess ROCE is to compare similar companies. Using our data, Win Hanverky Holdings's ROCE appears to be significantly below the 11% average in the Luxury industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Independently of how Win Hanverky Holdings compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.0% available in government bonds. It is likely that there are more attractive prospects out there.
Win Hanverky Holdings's current ROCE of 2.8% is lower than its ROCE in the past, which was 12%, 3 years ago. Therefore we wonder if the company is facing new headwinds. The image below shows how Win Hanverky Holdings's ROCE compares to its industry, and you can click it to see more detail on its past growth.
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. You can check if Win Hanverky Holdings has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Do Win Hanverky 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 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Win Hanverky Holdings has total liabilities of HK$1.2b and total assets of HK$3.4b. As a result, its current liabilities are equal to approximately 35% of its total assets. Win Hanverky Holdings has a medium level of current liabilities (boosting the ROCE somewhat), and a low ROCE.
The Bottom Line On Win Hanverky Holdings's ROCE
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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.
