Today we’ll look at Best Mart 360 Holdings Limited (HKG:2360) and reflect on its potential as an investment. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First up, we’ll look at what ROCE is and how we calculate it. Next, we’ll compare it to others in its industry. Then we’ll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. 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?
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 Best Mart 360 Holdings:
0.20 = HK$91m ÷ (HK$696m – HK$237m) (Based on the trailing twelve months to September 2019.)
Therefore, Best Mart 360 Holdings has an ROCE of 20%.
Does Best Mart 360 Holdings Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Best Mart 360 Holdings’s ROCE appears to be substantially greater than the 8.3% average in the Consumer Retailing industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the comparison to its industry for a moment, Best Mart 360 Holdings’s ROCE in absolute terms currently looks quite high.
Best Mart 360 Holdings’s current ROCE of 20% is lower than 3 years ago, when the company reported a 61% ROCE. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how Best Mart 360 Holdings’s past growth compares to other companies.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. You can check if Best Mart 360 Holdings has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
How Best Mart 360 Holdings’s Current Liabilities Impact Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that 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.
Best Mart 360 Holdings has current liabilities of HK$237m and total assets of HK$696m. As a result, its current liabilities are equal to approximately 34% of its total assets. Best Mart 360 Holdings has a medium level of current liabilities, boosting its ROCE somewhat.
Our Take On Best Mart 360 Holdings’s ROCE
Even so, it has a great ROCE, and could be an attractive prospect for further research. Best Mart 360 Holdings shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
If you spot an error that warrants correction, please contact the editor at [email protected]. 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.
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