Today we'll look at Emperor Entertainment Hotel Limited (HKG:296) and reflect on its potential as an investment. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Understanding 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'.
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 Emperor Entertainment Hotel:
0.047 = HK$265m ÷ (HK$6.2b - HK$562m) (Based on the trailing twelve months to March 2019.)
So, Emperor Entertainment Hotel has an ROCE of 4.7%.
Check out our latest analysis for Emperor Entertainment Hotel
Is Emperor Entertainment Hotel's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Emperor Entertainment Hotel's ROCE is around the 4.9% average reported by the Hospitality industry. Putting aside Emperor Entertainment Hotel's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. There are potentially more appealing investments elsewhere.
Emperor Entertainment Hotel's current ROCE of 4.7% is lower than its ROCE in the past, which was 8.8%, 3 years ago. Therefore we wonder if the company is facing new headwinds. The image below shows how Emperor Entertainment Hotel's ROCE compares to its industry, and you can click it to see more detail on its past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. You can check if Emperor Entertainment Hotel has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Do Emperor Entertainment Hotel's Current Liabilities Skew Its ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. 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.
Emperor Entertainment Hotel has total liabilities of HK$562m and total assets of HK$6.2b. Therefore its current liabilities are equivalent to approximately 9.0% of its total assets. Emperor Entertainment Hotel has a low level of current liabilities, which have a negligible impact on its already low ROCE.
What We Can Learn From Emperor Entertainment Hotel's ROCE
Nonetheless, there may be better places to invest your capital. You might be able to find a better investment than Emperor Entertainment Hotel. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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.
2019-09-23 03:40:14Z
https://finance.yahoo.com/news/think-emperor-entertainment-hotel-limited-032745603.html
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