【gas bombs for groundhogs】Why We’re Not Impressed By Fullshare Holdings Limited’s (HKG:607) 0.6% ROCE

Today we’ll look at Fullshare Holdings Limited (

HKG:607

) and reflect on its potential as an investment. Specifically,gas bombs for groundhogs we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First of all, we’ll work out how to calculate ROCE. Next, we’ll compare it to others in its industry. And finally, we’ll look at how its current liabilities are impacting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. 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’.

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 Fullshare Holdings:

0.006 = CN¥809m ÷ (CN¥57b – CN¥21b) (Based on the trailing twelve months to June 2018.)

Therefore,

Fullshare Holdings has an ROCE of 0.6%.

Check out our latest analysis for Fullshare Holdings

Is Fullshare Holdings’s ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, Fullshare Holdings’s ROCE appears to be significantly below the 9.4% average in the Electrical industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how Fullshare Holdings compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.0% available in government bonds. Readers may wish to look for more rewarding investments.

Fullshare Holdings’s current ROCE of 0.6% is lower than its ROCE in the past, which was 1.4%, 3 years ago. This makes us wonder if the business is facing new challenges.

SEHK:607 Past Revenue and Net Income, March 1st 2019

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. ROCE is only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our

free

report on analyst forecasts for the company

.

Fullshare Holdings’s Current Liabilities And Their Impact On 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 ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Fullshare Holdings has total assets of CN¥57b and current liabilities of CN¥21b. As a result, its current liabilities are equal to approximately 36% of its total assets. In light of sufficient current liabilities to noticeably boost the ROCE, Fullshare Holdings’s ROCE is concerning.

What We Can Learn From Fullshare Holdings’s ROCE

So researching other companies may be a better use of your time. Of course

you might be able to find a better stock than Fullshare 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).

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

[email protected]

. 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.

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