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Today we’ll look at MS Group Holdings Limited (
HKG:1451 ) 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. Firstly, 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. Understanding Return On Capital Employed (ROCE) ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. 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? 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 MS Group Holdings: 0.13 = HK$31m ÷ (HK$199m – HK$48m) (Based on the trailing twelve months to June 2018.) So, MS Group Holdings has an ROCE of 13%. Check out our latest analysis for MS Group Holdings Does MS Group Holdings Have A Good ROCE? One way to assess ROCE is to compare similar companies. We can see MS Group Holdings’s ROCE is around the 13% average reported by the Packaging industry. Separate from MS Group Holdings’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth. SEHK:1451 Last Perf February 1st 19 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. You can check if MS Group Holdings has cyclical profits by looking at this free graph of past earnings, revenue and cash flow . Do MS Group Holdings’s Current Liabilities Skew Its ROCE? Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. 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. MS Group Holdings has total assets of HK$199m and current liabilities of HK$48m. As a result, its current liabilities are equal to approximately 24% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much. What We Can Learn From MS Group Holdings’s ROCE With that in mind, MS Group Holdings’s ROCE appears pretty good. You might be able to find a better buy than MS Group Holdings. 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). 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 . View comments |
