Is Eggriculture Foods Ltd. (HKG:8609) Creating Value For Shareholders?

Today we'll evaluate Eggriculture Foods Ltd. (HKG:8609) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its 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'.

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 Eggriculture Foods:

0.099 = S$3.0m ÷ (S$42m - S$12m) (Based on the trailing twelve months to September 2019.)

Therefore, Eggriculture Foods has an ROCE of 9.9%.

See our latest analysis for Eggriculture Foods

Does Eggriculture Foods Have A Good ROCE?

One way to assess ROCE is to compare similar companies. We can see Eggriculture Foods's ROCE is around the 10% average reported by the Food industry. Separate from Eggriculture Foods's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

The image below shows how Eggriculture Foods'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 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. How cyclical is Eggriculture Foods? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

Eggriculture Foods's Current Liabilities And Their Impact On Its ROCE

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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.

Eggriculture Foods has total assets of S$42m and current liabilities of S$12m. As a result, its current liabilities are equal to approximately 28% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.

What We Can Learn From Eggriculture Foods's ROCE

Overall, Eggriculture Foods has a decent ROCE and could be worthy of further research. There might be better investments than Eggriculture Foods 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.

I will like Eggriculture Foods 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.

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.