What Can We Learn From Hyfusin Group Holdings Limited’s (HKG:8512) Investment Returns?

Today we are going to look at Hyfusin Group Holdings Limited (HKG:8512) to see whether it might be an attractive investment prospect. 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. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. 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?

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 Hyfusin Group Holdings:

0.14 = HK$16m ÷ (HK$178m - HK$64m) (Based on the trailing twelve months to September 2019.)

Therefore, Hyfusin Group Holdings has an ROCE of 14%.

See our latest analysis for Hyfusin Group Holdings

Does Hyfusin Group Holdings Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Hyfusin Group Holdings's ROCE appears to be around the 14% average of the Household Products industry. Separate from Hyfusin Group Holdings's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

Hyfusin Group Holdings's current ROCE of 14% is lower than its ROCE in the past, which was 40%, 3 years ago. So investors might consider if it has had issues recently. The image below shows how Hyfusin Group Holdings's ROCE compares to its industry, and you can click it to see more detail on its past growth.

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. How cyclical is Hyfusin Group Holdings? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

How Hyfusin Group Holdings's Current Liabilities Impact Its ROCE

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Hyfusin Group Holdings has total assets of HK$178m and current liabilities of HK$64m. Therefore its current liabilities are equivalent to approximately 36% of its total assets. Hyfusin Group Holdings has a middling amount of current liabilities, increasing its ROCE somewhat.

Our Take On Hyfusin Group Holdings's ROCE

With a decent ROCE, the company could be interesting, but remember that the level of current liabilities make the ROCE look better. Hyfusin Group 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.

I will like Hyfusin Group 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.