Is Luk Fook Holdings (International) Limited’s (HKG:590) 16% ROCE Any Good?

Today we are going to look at Luk Fook Holdings (International) Limited (HKG:590) to see whether it might be an attractive investment prospect. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. 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'.

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 Luk Fook Holdings (International):

0.16 = HK$1.7b ÷ (HK$14b - HK$3.5b) (Based on the trailing twelve months to September 2019.)

So, Luk Fook Holdings (International) has an ROCE of 16%.

Check out our latest analysis for Luk Fook Holdings (International)

Does Luk Fook Holdings (International) Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Luk Fook Holdings (International)'s ROCE is meaningfully higher than the 12% average in the Specialty Retail industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of where Luk Fook Holdings (International) sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

The image below shows how Luk Fook Holdings (International)'s ROCE compares to its industry, and you can click it to see more detail on its past growth.

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. 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, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Luk Fook Holdings (International).

Do Luk Fook Holdings (International)'s Current Liabilities Skew Its ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Luk Fook Holdings (International) has total assets of HK$14b and current liabilities of HK$3.5b. As a result, its current liabilities are equal to approximately 24% of its total assets. Low current liabilities are not boosting the ROCE too much.

The Bottom Line On Luk Fook Holdings (International)'s ROCE

With that in mind, Luk Fook Holdings (International)'s ROCE appears pretty good. There might be better investments than Luk Fook Holdings (International) out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

Luk Fook Holdings (International) is not the only stock that insiders are buying. 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 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.