Yahoo Finance China Display Optoelectronics Technology Holdings Limited (HKG:334) Might Not Be A Great Investment
Today we’ll evaluate China Display Optoelectronics Technology Holdings Limited (HKG:334) 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. 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.
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. Ultimately, it is a useful but imperfect metric. 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 China Display Optoelectronics Technology Holdings:
0.011 = CN¥122m ÷ (CN¥2.0b – CN¥1.3b) (Based on the trailing twelve months to June 2018.)
Therefore, China Display Optoelectronics Technology Holdings has an ROCE of 1.1%.
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Is China Display Optoelectronics Technology Holdings’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. We can see China Display Optoelectronics Technology Holdings’s ROCE is meaningfully below the Tech industry average of 5.7%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Independently of how China Display Optoelectronics Technology Holdings compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.0% available in government bonds. There are potentially more appealing investments elsewhere.
China Display Optoelectronics Technology Holdings’s current ROCE of 1.1% is lower than its ROCE in the past, which was 68%, 3 years ago. Therefore we wonder if the company is facing new headwinds.
Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for China Display Optoelectronics Technology Holdings.
China Display Optoelectronics Technology Holdings’s Current Liabilities And Their Impact On Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.
China Display Optoelectronics Technology Holdings has total liabilities of CN¥1.3b and total assets of CN¥2.0b. As a result, its current liabilities are equal to approximately 66% of its total assets. This is a fairly high level of current liabilities, boosting China Display Optoelectronics Technology Holdings’s ROCE.
The Bottom Line On China Display Optoelectronics Technology Holdings’s ROCE
Unfortunately, its ROCE is also pretty low, so we are cautious about the stock. Of course you might be able to find a better stock than China Display Optoelectronics Technology Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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 editorial-team@simplywallst.com.
