<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Today we are going to look at Wing On Company International Limited (HKG:289) to see whether it might be an attractive investment prospect. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.” data-reactid=”28″>Today we are going to look at Wing On Company International Limited (HKG:289) to see whether it might be an attractive investment prospect. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First, 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.
Return On Capital Employed (ROCE): What is it?
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. 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’.” data-reactid=”31″>ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. 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:
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)” data-reactid=”34″>Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Or for Wing On Company International:
0.032 = HK$645m ÷ (HK$21b – HK$593m) (Based on the trailing twelve months to December 2019.)
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Therefore, Wing On Company International has an ROCE of 3.2%.” data-reactid=”37″>Therefore, Wing On Company International has an ROCE of 3.2%.
ROCE is commonly used for comparing the performance of similar businesses. In this analysis, Wing On Company International’s ROCE appears meaningfully below the 7.4% average reported by the Multiline Retail industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how Wing On Company International stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). It is likely that there are more attractive prospects out there.
The image below shows how Wing On Company International’s ROCE compares to its industry, and you can click it to see more detail on its past growth.
SEHK:289 Past Revenue and Net Income April 1st 2020
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="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. If Wing On Company International is cyclical, it could make sense to check out this freegraph of past earnings, revenue and cash flow.” data-reactid=”54″>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. If Wing On Company International is cyclical, it could make sense to check out this freegraph of past earnings, revenue and cash flow.
Do Wing On Company International’s Current Liabilities Skew Its ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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.
Wing On Company International has current liabilities of HK$593m and total assets of HK$21b. As a result, its current liabilities are equal to approximately 2.8% of its total assets. Wing On Company International has a low level of current liabilities, which have a negligible impact on its already low ROCE.
What We Can Learn From Wing On Company International’s ROCE
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Nevertheless, there are potentially more attractive companies to invest in. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this freelist of companies with modest (or no) debt, trading on a P/E below 20. ” data-reactid=”63″>Nevertheless, there are potentially more attractive companies to invest in. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this freelist of companies with modest (or no) debt, trading on a P/E below 20.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="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.
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.” data-reactid=”65″>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.
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.
TORONTO – Strength in the energy and base metal stocks lifted Canada’s main stock index higher in late-morning trading, while U.S. stock markets also climbed higher.
The S&P/TSX composite index was up 78.80 points at 23,973.51.
In New York, the Dow Jones industrial average was up 89.81 points at 42,214.46. The S&P 500 index was up 2.55 points at 5,721.12, while the Nasdaq composite was up 21.24 points at 17,995.51.
The Canadian dollar traded for 74.24 cents US compared with 74.02 cents US on Monday.
The November crude oil contract was up US$1.06 at US$71.43 per barrel and the November natural gas contract was down two cents at US$2.83 per mmBTU.
The December gold contract was up US$18.10 at US$2,670.60 an ounce and the December copper contract was up 15 cents at US$4.49 a pound.
This report by The Canadian Press was first published Sept. 24, 2024.
TORONTO – Canada’s main stock index was essentially unchanged Friday, while U.S. markets were mixed to end the week, with the Dow ekeing out a new record high.
The S&P/TSX composite index closed up 1.28 points at 23,867.55.
In New York, the Dow Jones industrial average was up 38.17 points at 42,063.36. The S&P 500 index was down 11.09 points at 5,702.55, while the Nasdaq composite was down 65.66 points at 17,948.32.
The Canadian dollar traded for 73.72 cents UScompared with 73.73 cents US on Thursday.
The November crude oil contract was down 16 cents at US$71 per barrel and the November natural gas contract was up 12 cents at US$2.72 per mmBTU.
The December gold contract was up US$31.60 at US$2,646.20 an ounceand the December copper contract was down a penny at US$4.34 a pound.
This report by The Canadian Press was first published Sept. 20, 2024.
TORONTO – Canada’s main stock index was up more than 250 points in late-morning trading, led by strength in the base metal and technology sectors, while U.S. stock markets also charged higher.
The S&P/TSX composite index was up 254.62 points at 23,847.22.
In New York, the Dow Jones industrial average was up 432.77 points at 41,935.87. The S&P 500 index was up 96.38 points at 5,714.64, while the Nasdaq composite was up 486.12 points at 18,059.42.
The Canadian dollar traded for 73.68 cents US compared with 73.58 cents US on Thursday.
The November crude oil contract was up 89 cents at US$70.77 per barrel and the October natural gas contract was down a penny at US2.27 per mmBTU.
The December gold contract was up US$9.40 at US$2,608.00 an ounce and the December copper contract was up four cents at US$4.33 a pound.
This report by The Canadian Press was first published Sept. 19, 2024.
