Is Kingdee International Software Group Company Limited (HKG:268) Creating Value For Shareholders?

Today we'll look at Kingdee International Software Group Company Limited (HKG:268) and reflect on its potential as an investment. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First, 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 measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. 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'.

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 Kingdee International Software Group:

0.053 = CN¥342m ÷ (CN¥8.4b - CN¥2.0b) (Based on the trailing twelve months to December 2019.)

Therefore, Kingdee International Software Group has an ROCE of 5.3%.

View our latest analysis for Kingdee International Software Group

Is Kingdee International Software Group's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, Kingdee International Software Group's ROCE appears to be around the 6.6% average of the Software industry. Separate from how Kingdee International Software Group stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.

We can see that, Kingdee International Software Group currently has an ROCE of 5.3% compared to its ROCE 3 years ago, which was 4.1%. This makes us think the business might be improving. You can see in the image below how Kingdee International Software Group's ROCE compares to its industry. Click to see more on past growth.

When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

Do Kingdee International Software Group's Current Liabilities Skew Its ROCE?

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

Kingdee International Software Group has total assets of CN¥8.4b and current liabilities of CN¥2.0b. Therefore its current liabilities are equivalent to approximately 24% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.

The Bottom Line On Kingdee International Software Group's ROCE

If Kingdee International Software Group continues to earn an uninspiring ROCE, there may be better places to invest. Of course, you might also be able to find a better stock than Kingdee International Software Group. 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.

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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.