What Can We Make Of Noble Engineering Group Holdings Limited’s (HKG:8445) High Return On Capital?

Luis Baughman

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Today we are going to look at Noble Engineering Group Holdings Limited (HKG:8445) to see whether it might be an attractive investment prospect. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

Firstly, we’ll go over how we calculate ROCE. 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 amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. 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.’

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 Noble Engineering Group Holdings:

0.33 = HK$27m ÷ (HK$156m – HK$26m) (Based on the trailing twelve months to December 2018.)

So, Noble Engineering Group Holdings has an ROCE of 33%.

View our latest analysis for Noble Engineering Group Holdings

Is Noble Engineering Group Holdings’s ROCE Good?

One way to assess ROCE is to compare similar companies. Noble Engineering Group Holdings’s ROCE appears to be substantially greater than the 14% average in the Construction industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the comparison to its industry for a moment, Noble Engineering Group Holdings’s ROCE in absolute terms currently looks quite high.

SEHK:8445 Last Perf February 14th 19

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. How cyclical is Noble Engineering Group Holdings? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

How Noble Engineering Group 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. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Noble Engineering Group Holdings has total assets of HK$156m and current liabilities of HK$26m. Therefore its current liabilities are equivalent to approximately 17% of its total assets. A minimal amount of current liabilities limits the impact on ROCE.

The Bottom Line On Noble Engineering Group Holdings’s ROCE

This is good to see, and with such a high ROCE, Noble Engineering Group Holdings may be worth a closer look. Of course you might be able to find a better stock than Noble Engineering Group Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.