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Today we are going to look at DCB Holdings Limited (

HKG:8040

) to see whether it might be an attractive investment prospect. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First, 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.

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. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. 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?

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 DCB Holdings:

0.25 = HK$24m ÷ (HK$164m – HK$71m) (Based on the trailing twelve months to December 2018.)

Therefore,

DCB Holdings has an ROCE of 25%.

See our latest analysis for DCB Holdings

Does DCB Holdings Have A Good ROCE?

One way to assess ROCE is to compare similar companies. In our analysis, DCB Holdings’s ROCE is meaningfully higher than the 14% average in the Construction industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Putting aside its position relative to its industry for now, in absolute terms, DCB Holdings’s ROCE is currently very good.

SEHK:8040 Last Perf February 1st 19

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. You can check if DCB Holdings has cyclical profits by looking at this

free

graph of past earnings, revenue and cash flow

.

Do DCB 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 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Story continues

DCB Holdings has total assets of HK$164m and current liabilities of HK$71m. Therefore its current liabilities are equivalent to approximately 43% of its total assets. A medium level of current liabilities boosts DCB Holdings’s ROCE somewhat.

The Bottom Line On DCB Holdings’s ROCE

Even so, it has a great ROCE, and could be an attractive prospect for further research. Of course,

you might find a fantastic investment by looking at a few good candidates.

So take a peek at this

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If you like to buy stocks alongside management, then you might just love this

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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 protected]

.

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