Should You Like Café de Coral Holdings Limited’s (HKG:341) High Return On Capital Employed?

Today we'll look at Café de Coral Holdings Limited (HKG:341) and reflect on its potential as an investment. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. 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 Café de Coral Holdings:

0.12 = HK$608m ÷ (HK$6.7b - HK$1.7b) (Based on the trailing twelve months to September 2019.)

Therefore, Café de Coral Holdings has an ROCE of 12%.

See our latest analysis for Café de Coral Holdings

Is Café de Coral Holdings's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, Café de Coral Holdings's ROCE is meaningfully higher than the 5.4% average in the Hospitality industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where Café de Coral Holdings sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

Café de Coral Holdings's current ROCE of 12% is lower than its ROCE in the past, which was 19%, 3 years ago. So investors might consider if it has had issues recently. The image below shows how Café de Coral Holdings's ROCE compares to its industry, and you can click it to see more detail on its past growth.

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

Café de Coral Holdings's Current Liabilities And Their Impact On Its ROCE

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. 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.

Café de Coral Holdings has current liabilities of HK$1.7b and total assets of HK$6.7b. As a result, its current liabilities are equal to approximately 26% of its total assets. Low current liabilities are not boosting the ROCE too much.

The Bottom Line On Café de Coral Holdings's ROCE

Overall, Café de Coral Holdings has a decent ROCE and could be worthy of further research. Café de Coral 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 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.