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Why You Should Like Ausupreme International Holdings Limited’s (HKG:2031) ROCE

Today we'll evaluate Ausupreme International Holdings Limited (HKG:2031) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First up, we'll look at what ROCE is and how we calculate it. 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. In general, businesses with a higher ROCE are usually better quality. 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?

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 Ausupreme International Holdings:

0.17 = HK$32m ÷ (HK$241m - HK$53m) (Based on the trailing twelve months to September 2019.)

So, Ausupreme International Holdings has an ROCE of 17%.

See our latest analysis for Ausupreme International Holdings

Is Ausupreme International Holdings's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Ausupreme International Holdings's ROCE is meaningfully better than the 9.1% average in the Retail Distributors industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where Ausupreme International Holdings sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

We can see that, Ausupreme International Holdings currently has an ROCE of 17% compared to its ROCE 3 years ago, which was 8.6%. This makes us wonder if the company is improving. You can see in the image below how Ausupreme International Holdings's ROCE compares to its industry. Click to see more on past growth.

SEHK:2031 Past Revenue and Net Income, February 29th 2020
SEHK:2031 Past Revenue and Net Income, February 29th 2020

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. ROCE is, after all, simply a snap shot of a single year. How cyclical is Ausupreme International Holdings? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

How Ausupreme International Holdings's Current Liabilities Impact Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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.

Ausupreme International Holdings has total assets of HK$241m and current liabilities of HK$53m. As a result, its current liabilities are equal to approximately 22% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.

What We Can Learn From Ausupreme International Holdings's ROCE

This is good to see, and with a sound ROCE, Ausupreme International Holdings could be worth a closer look. Ausupreme International Holdings looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.

I will like Ausupreme International Holdings better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

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.