Should Hao Bai International (Cayman) Limited’s (HKG:8431) Weak Investment Returns Worry You?

Simply Wall St

Today we'll look at Hao Bai International (Cayman) Limited (HKG:8431) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

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

Understanding Return On Capital Employed (ROCE)

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its 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.

So, How Do We Calculate ROCE?

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 Hao Bai International (Cayman):

0.058 = HK$5.9m ÷ (HK$188m - HK$88m) (Based on the trailing twelve months to June 2019.)

Therefore, Hao Bai International (Cayman) has an ROCE of 5.8%.

View our latest analysis for Hao Bai International (Cayman)

Is Hao Bai International (Cayman)'s ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, Hao Bai International (Cayman)'s ROCE appears to be significantly below the 12% average in the Construction industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Setting aside the industry comparison for now, Hao Bai International (Cayman)'s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.

We can see that, Hao Bai International (Cayman) currently has an ROCE of 5.8%, less than the 47% it reported 3 years ago. This makes us wonder if the business is facing new challenges. You can see in the image below how Hao Bai International (Cayman)'s ROCE compares to its industry. Click to see more on past growth.

SEHK:8431 Past Revenue and Net Income, October 10th 2019

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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. How cyclical is Hao Bai International (Cayman)? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

Hao Bai International (Cayman)'s Current Liabilities And Their Impact On Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Hao Bai International (Cayman) has total assets of HK$188m and current liabilities of HK$88m. As a result, its current liabilities are equal to approximately 47% of its total assets. Hao Bai International (Cayman)'s ROCE is improved somewhat by its moderate amount of current liabilities.

The Bottom Line On Hao Bai International (Cayman)'s ROCE

Despite this, its ROCE is still mediocre, and you may find more appealing investments elsewhere. You might be able to find a better investment than Hao Bai International (Cayman). 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).

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.