Are Fujikon Industrial Holdings Limited’s Returns On Capital Worth Investigating?

Simply Wall St

Today we'll look at Fujikon Industrial Holdings Limited (HKG:927) and reflect on its potential as an investment. 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, we'll go over how we 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 measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. 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 Fujikon Industrial Holdings:

0.10 = HK$76m ÷ (HK$1.0b - HK$304m) (Based on the trailing twelve months to March 2019.)

So, Fujikon Industrial Holdings has an ROCE of 10%.

Check out our latest analysis for Fujikon Industrial Holdings

Does Fujikon Industrial Holdings Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, Fujikon Industrial Holdings's ROCE appears to be around the 10% average of the Consumer Durables industry. Regardless of where Fujikon Industrial Holdings sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

We can see that, Fujikon Industrial Holdings currently has an ROCE of 10% compared to its ROCE 3 years ago, which was 2.4%. This makes us wonder if the company is improving. You can see in the image below how Fujikon Industrial Holdings's ROCE compares to its industry. Click to see more on past growth.

SEHK:927 Past Revenue and Net Income, October 18th 2019
SEHK:927 Past Revenue and Net Income, October 18th 2019

When considering ROCE, bear in mind that it reflects the past and does not necessarily 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, after all, simply a snap shot of a single year. You can check if Fujikon Industrial Holdings has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

What Are Current Liabilities, And How Do They Affect Fujikon Industrial Holdings's ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Fujikon Industrial Holdings has total liabilities of HK$304m and total assets of HK$1.0b. Therefore its current liabilities are equivalent to approximately 29% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.

The Bottom Line On Fujikon Industrial Holdings's ROCE

With that in mind, Fujikon Industrial Holdings's ROCE appears pretty good. There might be better investments than Fujikon Industrial Holdings 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.

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.