Today we are going to look at Citychamp Watch & Jewellery Group Limited (HKG:256) 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.

First up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the amount of pre-tax profits a company can generate from the 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. 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 Citychamp Watch & Jewellery Group:

0.021 = HK$369m ÷ (HK$20b - HK$2.3b) (Based on the trailing twelve months to December 2018.)

Therefore, Citychamp Watch & Jewellery Group has an ROCE of 2.1%.

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Check out our latest analysis for Citychamp Watch & Jewellery Group

Does Citychamp Watch & Jewellery Group Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. We can see Citychamp Watch & Jewellery Group's ROCE is meaningfully below the Luxury industry average of 10.0%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Putting aside Citychamp Watch & Jewellery Group's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. There are potentially more appealing investments elsewhere.

Citychamp Watch & Jewellery Group's current ROCE of 2.1% is lower than 3 years ago, when the company reported a 5.2% ROCE. Therefore we wonder if the company is facing new headwinds.

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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If Citychamp Watch & Jewellery Group is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

Citychamp Watch & Jewellery Group's Current Liabilities And Their Impact On 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.

Citychamp Watch & Jewellery Group has total assets of HK$20b and current liabilities of HK$2.3b. Therefore its current liabilities are equivalent to approximately 12% of its total assets. This is a modest level of current liabilities, which will have a limited impact on the ROCE.

The Bottom Line On Citychamp Watch & Jewellery Group's ROCE

Citychamp Watch & Jewellery Group has a poor ROCE, and there may be better investment prospects out there. You might be able to find a better investment than Citychamp Watch & Jewellery Group. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.

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. Thank you for reading.