Yahoo Finance Here’s why CK Infrastructure Holdings Limited’s (HKG:1038) Returns On Capital Matters So Much
Today we’ll evaluate CK Infrastructure Holdings Limited (HKG:1038) to determine whether it could have potential as an investment idea. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
Firstly, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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?
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 CK Infrastructure Holdings:
0.021 = HK$2.7b ÷ (HK$159b – HK$9.0b) (Based on the trailing twelve months to June 2018.)
So, CK Infrastructure Holdings has an ROCE of 2.1%.
View our latest analysis for CK Infrastructure Holdings
Does CK Infrastructure Holdings Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Using our data, CK Infrastructure Holdings’s ROCE appears to be significantly below the 6.6% average in the Electric Utilities industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Putting aside CK Infrastructure Holdings’s performance relative to its industry, its ROCE in absolute terms is poor – considering the risk of owning stocks compared to government bonds. It is likely that there are more attractive prospects out there.
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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for CK Infrastructure Holdings.
What Are Current Liabilities, And How Do They Affect CK Infrastructure Holdings’s ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.
CK Infrastructure Holdings has total assets of HK$159b and current liabilities of HK$9.0b. As a result, its current liabilities are equal to approximately 5.7% of its total assets. With barely any current liabilities, there is minimal impact on CK Infrastructure Holdings’s admittedly low ROCE.
Our Take On CK Infrastructure Holdings’s ROCE
Nevertheless, there are potentially more attractive companies to invest in. Of course you might be able to find a better stock than CK Infrastructure 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.
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.
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. Thank you for reading.
