Today we are going to look at Powerleader Science & Technology Group Limited (HKG:8236) to see whether it might be an attractive investment prospect. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First up, we’ll look at what ROCE is and how we calculate it. Next, we’ll compare it to others in its industry. And finally, we’ll look at how its current liabilities are impacting 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. 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?

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 Powerleader Science & Technology Group:

0.081 = CN¥150m ÷ (CN¥3.7b – CN¥1.9b) (Based on the trailing twelve months to June 2019.)

So, Powerleader Science & Technology Group has an ROCE of 8.1%.

Check out our latest analysis for Powerleader Science & Technology Group

Does Powerleader Science & Technology Group Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. We can see Powerleader Science & Technology Group’s ROCE is around the 6.9% average reported by the Tech industry. Aside from the industry comparison, Powerleader Science & Technology Group’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.

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The image below shows how Powerleader Science & Technology Group’s ROCE compares to its industry, and you can click it to see more detail on its past growth.

SEHK:8236 Past Revenue and Net Income, September 20th 2019
SEHK:8236 Past Revenue and Net Income, September 20th 2019

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. If Powerleader Science & Technology Group is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

Powerleader Science & Technology Group’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 counter this, investors can check if a company has high current liabilities relative to total assets.

Powerleader Science & Technology Group has total liabilities of CN¥1.9b and total assets of CN¥3.7b. Therefore its current liabilities are equivalent to approximately 50% of its total assets. Powerleader Science & Technology Group’s current liabilities are fairly high, making its ROCE look better than otherwise.

What We Can Learn From Powerleader Science & Technology Group’s ROCE

Despite this, the company also has a uninspiring ROCE, which is not an ideal combination in this analysis. You might be able to find a better investment than Powerleader Science & Technology Group. 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).

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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.

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