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Why We Like Lifestyle International Holdings Limited’s (HKG:1212) 9.6% Return On Capital Employed

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Simply Wall St
·4-min read
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Today we are going to look at Lifestyle International Holdings Limited (HKG:1212) 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 of all, we'll work out how to 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 measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. 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 Lifestyle International Holdings:

0.096 = HK$1.8b ÷ (HK$25b - HK$5.6b) (Based on the trailing twelve months to December 2019.)

So, Lifestyle International Holdings has an ROCE of 9.6%.

Check out our latest analysis for Lifestyle International Holdings

Does Lifestyle International Holdings Have A Good ROCE?

One way to assess ROCE is to compare similar companies. In our analysis, Lifestyle International Holdings's ROCE is meaningfully higher than the 7.7% average in the Multiline Retail 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. Aside from the industry comparison, Lifestyle International Holdings'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.

Lifestyle International Holdings's current ROCE of 9.6% is lower than its ROCE in the past, which was 16%, 3 years ago. So investors might consider if it has had issues recently. The image below shows how Lifestyle International Holdings's ROCE compares to its industry, and you can click it to see more detail on its past growth.

SEHK:1212 Past Revenue and Net Income May 24th 2020
SEHK:1212 Past Revenue and Net Income May 24th 2020

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 misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

How Lifestyle International Holdings's Current Liabilities Impact 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Lifestyle International Holdings has current liabilities of HK$5.6b and total assets of HK$25b. As a result, its current liabilities are equal to approximately 23% of its total assets. It is good to see a restrained amount of current liabilities, as this limits the effect on ROCE.

Our Take On Lifestyle International Holdings's ROCE

That said, Lifestyle International Holdings's ROCE is mediocre, there may be more attractive investments around. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

Love or hate this article? Concerned about the content? Get in touch with us directly. Alternatively, email 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. 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.