Today, we will examine Gold-Finance Holdings Limited (HKG: 1462) and consider its potential as an investment. Specifically, we will examine its return on capital employed (ROCE), as this will give us an idea of how the company can efficiently generate profits from the capital it needs.
First, let's examine how we calculate ROCE. We will then compare its ROCE with similar companies. Then we will determine how his current liabilities affect his ROCE.
What is return on capital used (ROCE)?
ROCE measures the amount of pre-tax profits that a company can generate from the capital used in its business. All things being equal, a better company will have a higher ROCE. Overall, it's a valuable metric that has its flaws. Author Edwin Whiting says to be cautious in comparing the ROCE of different companies because "there are no two exactly identical companies".
How do you calculate the return on capital employed?
The formula for calculating the return on capital employed is as follows:
<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 taxes (EBIT) ÷ (Total Assets – Current Liabilities)"data-reactid =" 34 ">Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (Total Assets – Current Liabilities)
Or for Gold-Finance Holdings:
0.12 = HK $ 82 million (HK $ 1.2 billion – HK $ 400 million) (based on the last twelve months up to September 2018.)
<p class = "canvas-atom-canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "So, Gold-Finance Holdings has a ROCE of 12%. "data-reactid =" 37 "> So, Gold-Finance Holdings has a ROCE of 12%.
<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = " See our latest analysis for Gold-Finance Holdings "data-reactid =" 38 "> Check out our latest analysis for Gold-Finance Holdings
Does Gold-Finance Holdings have a good ROCE?
When they make comparisons between similar companies, investors can find ROCE useful. Using our data, the ROCE of Gold-Finance Holdings appears to be around the average of 14% of the construction sector. Separated from the performance of Gold-Finance Holdings in relation to its sector, its ROCE in absolute terms seems satisfactory and it may be useful to deepen its research.
Gold-Finance Holdings' current 12% ROCE is lower than 21% three years ago. So, investors might consider if he has had problems recently.
SEHK: 1462 Last Perf February 10 19
<p class = "canvas-atom-text-canvas Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "When you plan to create this metric, keep in mind! 39 ROCE can be misleading for companies in cyclical industries, with impressive returns in times of economic boom, but very weak in times of crisis.The ROCE is actually just a snapshot of a year to the other How Gold-Finance Holdings is cyclical? free Data-reactid = "54"> When looking at this indicator, keep in mind that it is retrospective and not necessarily predictive. ROCE can mislead companies in the cyclical sector, with impressive returns during a period of economic prosperity, but very weak during periods of economic crisis. ROCE is, after all, a simple snapshot from year to year. How Gold-Finance Holdings Is Cyclical? free graph of previous revenues, revenues and cash flows.
What are current liabilities and how do they affect the ROCE of Gold-Finance Holdings?
Current liabilities include bills, such as vendor payments, short-term debt or a tax bill, which must be paid within 12 months. Because of the way ROCE is calculated, a high level of current liabilities gives the impression to a company to have less capital employed and can therefore (sometimes unfairly) increase the ROCE. To verify the impact, we calculate whether a company has a high short-term liability relative to its total assets.
Gold-Finance Holdings has total assets of $ 1.2 billion and current liabilities of $ 400 million. As a result, its current liabilities are equal to approximately 33% of its total assets. With this level of short-term liabilities, the ROCE of Gold-Finance Holdings is somewhat improved.
What we can learn from the ROCE of Gold-Finance Holdings
The story continues