Today we'll look at Chong Fai Jewellery Group Holdings Company Limited (HKG:8537) 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.

Return On Capital Employed (ROCE): What is it?

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. 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 Chong Fai Jewellery Group Holdings:

0.076 = HK$7.5m ÷ (HK$153m - HK$55m) (Based on the trailing twelve months to December 2019.)

Therefore, Chong Fai Jewellery Group Holdings has an ROCE of 7.6%.

See our latest analysis for Chong Fai Jewellery Group Holdings

Does Chong Fai Jewellery Group Holdings Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. We can see Chong Fai Jewellery Group Holdings's ROCE is around the 8.6% average reported by the Luxury industry. Separate from how Chong Fai Jewellery Group Holdings stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.

You can click on the image below to see (in greater detail) how Chong Fai Jewellery Group Holdings's past growth compares to other companies.

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. ROCE is, after all, simply a snap shot of a single year. If Chong Fai Jewellery Group Holdings is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

Chong Fai Jewellery Group Holdings's Current Liabilities And Their Impact On 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 ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.