Today we are going to look at Evergreen Products Group Limited (HKG:1962) to see whether it might be an attractive investment prospect. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First, we'll go over how we calculate ROCE. 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 measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.

How Do You Calculate Return On Capital Employed?

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 Evergreen Products Group:

0.14 = HK$110m ÷ (HK$1.6b - HK$849m) (Based on the trailing twelve months to June 2019.)

So, Evergreen Products Group has an ROCE of 14%.

View our latest analysis for Evergreen Products Group

Is Evergreen Products Group's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, Evergreen Products Group's ROCE is meaningfully higher than the 11% average in the Personal Products industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where Evergreen Products Group sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

Evergreen Products Group's current ROCE of 14% is lower than 3 years ago, when the company reported a 29% ROCE. This makes us wonder if the business is facing new challenges. You can see in the image below how Evergreen Products Group'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. 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 Evergreen Products Group is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

Evergreen Products Group'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 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.

Evergreen Products Group has total assets of HK$1.6b and current liabilities of HK$849m. Therefore its current liabilities are equivalent to approximately 53% of its total assets. Evergreen Products Group's current liabilities are fairly high, which increases its ROCE significantly.

Our Take On Evergreen Products Group's ROCE

While its ROCE looks decent, it wouldn't look so good if it reduced current liabilities. There might be better investments than Evergreen Products Group 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).

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.