Today we are going to look at Wong's Kong King International (Holdings) Limited (HKG:532) 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.
First up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting 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. Generally speaking a higher ROCE is better. 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.
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 Wong's Kong King International (Holdings):
0.079 = HK$133m ÷ (HK$3.5b - HK$1.9b) (Based on the trailing twelve months to June 2019.)
Therefore, Wong's Kong King International (Holdings) has an ROCE of 7.9%.
Does Wong's Kong King International (Holdings) Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Wong's Kong King International (Holdings)'s ROCE appears to be around the 9.3% average of the Electronic industry. Aside from the industry comparison, Wong's Kong King International (Holdings)'s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
Our data shows that Wong's Kong King International (Holdings) currently has an ROCE of 7.9%, compared to its ROCE of 5.5% 3 years ago. This makes us wonder if the company is improving. The image below shows how Wong's Kong King International (Holdings)'s ROCE compares to its industry, and you can click it to see more detail on its 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. How cyclical is Wong's Kong King International (Holdings)? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Wong's Kong King International (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. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Wong's Kong King International (Holdings) has current liabilities of HK$1.9b and total assets of HK$3.5b. As a result, its current liabilities are equal to approximately 52% of its total assets. With a high level of current liabilities, Wong's Kong King International (Holdings) will experience a boost to its ROCE.
What We Can Learn From Wong's Kong King International (Holdings)'s ROCE
Despite this, the company also has a uninspiring ROCE, which is not an ideal combination in this analysis. You might be able to find a better investment than Wong's Kong King International (Holdings). 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 Wong's Kong King International (Holdings) better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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