Is Combine Will International Holdings Limited’s (SGX:N0Z) 11% Return On Capital Employed Good News?

Today we are going to look at Combine Will International Holdings Limited (SGX:N0Z) 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. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

What is 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. In brief, it is a useful tool, but it is not without drawbacks. 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'.

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 Combine Will International Holdings:

0.11 = HK$83m ÷ (HK$1.6b - HK$773m) (Based on the trailing twelve months to December 2019.)

So, Combine Will International Holdings has an ROCE of 11%.

View our latest analysis for Combine Will International Holdings

Is Combine Will International Holdings's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. We can see Combine Will International Holdings's ROCE is around the 9.1% average reported by the Leisure industry. Separate from Combine Will International Holdings's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

Combine Will International Holdings reported an ROCE of 11% -- better than 3 years ago, when the company didn't make a profit. This makes us wonder if the company is improving. You can see in the image below how Combine Will International Holdings's ROCE compares to its industry. Click to see more on past growth.

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. If Combine Will International Holdings is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

How Combine Will International Holdings's Current Liabilities Impact Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Combine Will International Holdings has total assets of HK$1.6b and current liabilities of HK$773m. Therefore its current liabilities are equivalent to approximately 50% of its total assets. Combine Will International Holdings has a medium level of current liabilities, which would boost the ROCE.

Our Take On Combine Will International Holdings's ROCE

Combine Will International Holdings's ROCE does look good, but the level of current liabilities also contribute to that. Combine Will International 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.

If you are like me, then you will not want to miss this free list of growing companies that insiders are 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.

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.