Why We Like A-Living Services Co., Ltd.’s (HKG:3319) 23% Return On Capital Employed

Today we'll look at A-Living Services Co., Ltd. (HKG:3319) 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.

Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.

Understanding Return On Capital Employed (ROCE)

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. Ultimately, it is a useful but imperfect metric. 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?

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 A-Living Services:

0.23 = CN¥1.6b ÷ (CN¥9.4b - CN¥2.7b) (Based on the trailing twelve months to December 2019.)

Therefore, A-Living Services has an ROCE of 23%.

Check out our latest analysis for A-Living Services

Does A-Living Services Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. A-Living Services's ROCE appears to be substantially greater than the 14% average in the Commercial Services industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of the industry comparison, in absolute terms, A-Living Services's ROCE currently appears to be excellent.

You can click on the image below to see (in greater detail) how A-Living Services's past growth compares to other companies.

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. Since the future is so important for investors, you should check out our free report on analyst forecasts for A-Living Services.

Do A-Living Services's Current Liabilities Skew 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 counter this, investors can check if a company has high current liabilities relative to total assets.

A-Living Services has total assets of CN¥9.4b and current liabilities of CN¥2.7b. As a result, its current liabilities are equal to approximately 29% of its total assets. A minimal amount of current liabilities limits the impact on ROCE.

The Bottom Line On A-Living Services's ROCE

This is good to see, and with such a high ROCE, A-Living Services may be worth a closer look. A-Living Services looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.

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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.