Does CSMall Group Limited (HKG:1815) Create Value For Shareholders?

Today we are going to look at CSMall Group Limited (HKG:1815) 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.

Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.

Understanding 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. 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.

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 CSMall Group:

0.12 = CN¥155m ÷ (CN¥1.7b - CN¥432m) (Based on the trailing twelve months to June 2019.)

Therefore, CSMall Group has an ROCE of 12%.

Check out our latest analysis for CSMall Group

Does CSMall Group Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, CSMall Group's ROCE appears to be around the 12% average of the Specialty Retail industry. Regardless of where CSMall Group sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

CSMall Group's current ROCE of 12% is lower than its ROCE in the past, which was 29%, 3 years ago. Therefore we wonder if the company is facing new headwinds. The image below shows how CSMall Group's ROCE compares to its industry, and you can click it to see more detail on its past growth.

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. If CSMall Group is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

CSMall Group'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. 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 counter this, investors can check if a company has high current liabilities relative to total assets.

CSMall Group has total assets of CN¥1.7b and current liabilities of CN¥432m. Therefore its current liabilities are equivalent to approximately 25% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.

What We Can Learn From CSMall Group's ROCE

This is good to see, and with a sound ROCE, CSMall Group could be worth a closer look. CSMall Group shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.

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. Thank you for reading.