Today we are going to look at Kerry Logistics Network Limited (HKG:636) to see whether it might be an attractive investment prospect. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the 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. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. Renowned investment researcher Michael Mauboussin 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 Kerry Logistics Network:
0.064 = HK$2.3b ÷ (HK$47b – HK$11b) (Based on the trailing twelve months to June 2019.)
Therefore, Kerry Logistics Network has an ROCE of 6.4%.
See our latest analysis for Kerry Logistics Network
Does Kerry Logistics Network Have A Good ROCE?
One way to assess ROCE is to compare similar companies. We can see Kerry Logistics Network’s ROCE is around the 6.4% average reported by the Logistics industry. Setting aside the industry comparison for now, Kerry Logistics Network’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
You can see in the image below how Kerry Logistics Network’s ROCE compares to its industry. Click to see more on past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
How Kerry Logistics Network’s Current Liabilities Impact 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 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.
Kerry Logistics Network has total assets of HK$47b and current liabilities of HK$11b. As a result, its current liabilities are equal to approximately 23% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.
What We Can Learn From Kerry Logistics Network’s ROCE
That said, Kerry Logistics Network’s ROCE is mediocre, there may be more attractive investments around. You might be able to find a better investment than Kerry Logistics Network. 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.
If you spot an error that warrants correction, please contact the editor at [email protected]. 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.
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