Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Today we’ll look at PC Partner Group Limited (HKG:1263) and reflect on its potential as an investment.
Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
Firstly, we’ll go over how we calculate ROCE.
Then we’ll compare its ROCE to similar companies.
Then we’ll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its 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 PC Partner Group:
0.52 = HK$375m ÷ (HK$5.0b – HK$3.6b) (Based on the trailing twelve months to June 2018.)
Therefore, PC Partner Group has an ROCE of 52%.
Does PC Partner Group Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies.
Using our data, we find that PC Partner Group’s ROCE is meaningfully better than the 5.7% average in the Tech industry.
We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies.
Regardless of the industry comparison, in absolute terms, PC Partner Group’s ROCE currently appears to be excellent.
Our data shows that PC Partner Group currently has an ROCE of 52%, compared to its ROCE of 6.2% 3 years ago.
This makes us think the business might be improving.
It is important to remember that ROCE shows past performance, and is 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.
ROCE is only a point-in-time measure.
What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for PC Partner Group.
What Are Current Liabilities, And How Do They Affect PC Partner Group’s ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
PC Partner Group has total assets of HK$5.0b and current liabilities of HK$3.6b.
As a result, its current liabilities are equal to approximately 72% of its total assets.
While a high level of current liabilities boosts its ROCE, PC Partner Group’s returns are still very good.
The Bottom Line On PC Partner Group’s ROCE
So to us, the company is potentially worth investigating further.
You might be able to find a better buy than PC Partner Group. 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 are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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 email@example.com.
Discounted cash flow calculation for every stock
Simply Wall St does a detailed discounted cash flow calculation every 6 hours for every stock on the market, so if you want to find the intrinsic value of any company just search here. It’s FREE.