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Today we'll look at Galaxy Entertainment Group Limited (HKG:27) and reflect on its potential as an investment. 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 of all, we'll work out how to 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.

Understanding Return On Capital Employed (ROCE)

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. 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?

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 Galaxy Entertainment Group:

0.19 = HK$12b ÷ (HK$87b - HK$24b) (Based on the trailing twelve months to December 2018.)

So, Galaxy Entertainment Group has an ROCE of 19%.

Check out our latest analysis for Galaxy Entertainment Group

Does Galaxy Entertainment Group Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Galaxy Entertainment Group's ROCE appears to be substantially greater than the 5.8% average in the Hospitality industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Independently of how Galaxy Entertainment Group compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

As we can see, Galaxy Entertainment Group currently has an ROCE of 19% compared to its ROCE 3 years ago, which was 9.8%. This makes us think about whether the company has been reinvesting shrewdly.

It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Galaxy Entertainment Group.

Galaxy Entertainment Group's Current Liabilities And Their Impact On Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Galaxy Entertainment Group has total liabilities of HK$24b and total assets of HK$87b. As a result, its current liabilities are equal to approximately 27% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.

The Bottom Line On Galaxy Entertainment Group's ROCE

This is good to see, and with a sound ROCE, Galaxy Entertainment Group could be worth a closer look. There might be better investments than Galaxy Entertainment 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 are like me, then you will not want to miss this free list of growing companies that insiders are buying.

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.