Today we'll evaluate Vodatel Networks Holdings Limited (HKG:8033) to determine whether it could have potential as an investment idea. 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 up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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?

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 Vodatel Networks Holdings:

0.0094 = HK$1.9m ÷ (HK$388m - HK$189m) (Based on the trailing twelve months to September 2019.)

So, Vodatel Networks Holdings has an ROCE of 0.9%.

View our latest analysis for Vodatel Networks Holdings

Does Vodatel Networks Holdings Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Vodatel Networks Holdings's ROCE appears to be significantly below the 9.0% average in the Communications industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Regardless of how Vodatel Networks Holdings stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). It is likely that there are more attractive prospects out there.

Vodatel Networks Holdings's current ROCE of 0.9% is lower than its ROCE in the past, which was 1.3%, 3 years ago. So investors might consider if it has had issues recently. You can see in the image below how Vodatel Networks Holdings's ROCE compares to its industry. Click to see more on past growth.

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. 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. How cyclical is Vodatel Networks Holdings? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

Do Vodatel Networks Holdings's Current Liabilities Skew Its ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Vodatel Networks Holdings has total assets of HK$388m and current liabilities of HK$189m. As a result, its current liabilities are equal to approximately 49% of its total assets. In light of sufficient current liabilities to noticeably boost the ROCE, Vodatel Networks Holdings's ROCE is concerning.

Our Take On Vodatel Networks Holdings's ROCE

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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.