Why You Should Like Grown Up Group Investment Holdings Limited’s (HKG:1842) ROCE

Today we'll evaluate Grown Up Group Investment Holdings Limited (HKG:1842) to determine whether it could have potential as an investment idea. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

First of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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.

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 Grown Up Group Investment Holdings:

0.27 = HK$44m ÷ (HK$442m - HK$281m) (Based on the trailing twelve months to June 2019.)

Therefore, Grown Up Group Investment Holdings has an ROCE of 27%.

View our latest analysis for Grown Up Group Investment Holdings

Does Grown Up Group Investment Holdings Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Grown Up Group Investment Holdings's ROCE appears to be substantially greater than the 9.6% average in the Luxury 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, Grown Up Group Investment Holdings's ROCE is currently very good.

The image below shows how Grown Up Group Investment Holdings'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. 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. If Grown Up Group Investment Holdings is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

How Grown Up Group Investment Holdings's Current Liabilities Impact 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 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Grown Up Group Investment Holdings has total assets of HK$442m and current liabilities of HK$281m. As a result, its current liabilities are equal to approximately 64% of its total assets. Grown Up Group Investment Holdings boasts an attractive ROCE, even after considering the boost from high current liabilities.

Our Take On Grown Up Group Investment Holdings's ROCE

So we would be interested in doing more research here -- there may be an opportunity! Grown Up Group Investment Holdings 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.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.