Today we'll look at Yue Yuen Industrial (Holdings) Limited (HKG:551) and reflect on its potential as an investment. 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 up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
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. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'
How Do You Calculate Return On Capital Employed?
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 Yue Yuen Industrial (Holdings):
0.067 = US$402m ÷ (US$8.3b - US$2.3b) (Based on the trailing twelve months to March 2019.)
Therefore, Yue Yuen Industrial (Holdings) has an ROCE of 6.7%.
Does Yue Yuen Industrial (Holdings) Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, Yue Yuen Industrial (Holdings)'s ROCE appears to be significantly below the 11% average in the Luxury industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Aside from the industry comparison, Yue Yuen Industrial (Holdings)'s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.
You can see in the image below how Yue Yuen Industrial (Holdings)'s ROCE compares to its industry. Click to see more on past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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 only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Yue Yuen Industrial (Holdings)'s Current Liabilities And Their Impact On Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Yue Yuen Industrial (Holdings) has total assets of US$8.3b and current liabilities of US$2.3b. Therefore its current liabilities are equivalent to approximately 28% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.
Our Take On Yue Yuen Industrial (Holdings)'s ROCE
With that in mind, we're not overly impressed with Yue Yuen Industrial (Holdings)'s ROCE, so it may not be the most appealing prospect. Of course, you might also be able to find a better stock than Yue Yuen Industrial (Holdings). So you may wish to see this free collection of other companies that have grown earnings strongly.
If you are like me, then you will not want to miss this free list of growing companies that insiders are 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 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. Thank you for reading.