Why You Should Like Golden Throat Holdings Group Company Limited’s (HKG:6896) ROCE
Today we'll look at Golden Throat Holdings Group Company Limited (HKG:6896) 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. And finally, we'll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. 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?
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 Golden Throat Holdings Group:
0.17 = CN¥177m ÷ (CN¥1.7b - CN¥699m) (Based on the trailing twelve months to June 2019.)
Therefore, Golden Throat Holdings Group has an ROCE of 17%.
View our latest analysis for Golden Throat Holdings Group
Is Golden Throat Holdings Group's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Golden Throat Holdings Group's ROCE appears to be substantially greater than the 11% average in the Personal Products 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. Independently of how Golden Throat Holdings Group compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
You can see in the image below how Golden Throat Holdings Group's ROCE compares to its industry. Click to see more on past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If Golden Throat Holdings Group is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
How Golden Throat Holdings Group's Current Liabilities Impact 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Golden Throat Holdings Group has total assets of CN¥1.7b and current liabilities of CN¥699m. Therefore its current liabilities are equivalent to approximately 40% of its total assets. With this level of current liabilities, Golden Throat Holdings Group's ROCE is boosted somewhat.
What We Can Learn From Golden Throat Holdings Group's ROCE
With a decent ROCE, the company could be interesting, but remember that the level of current liabilities make the ROCE look better. Golden Throat Holdings Group looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
I will like Golden Throat Holdings Group 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 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.
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