Should Wise Talent Information Technology Co., Ltd’s (HKG:6100) Weak Investment Returns Worry You?
Today we are going to look at Wise Talent Information Technology Co., Ltd (HKG:6100) to see whether it might be an attractive investment prospect. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. And finally, we’ll look at how its current liabilities are impacting 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. 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.
How Do You Calculate Return On Capital Employed?
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 Wise Talent Information Technology:
0.012 = CN¥39m ÷ (CN¥4.2b – CN¥1.0b) (Based on the trailing twelve months to December 2019.)
Therefore, Wise Talent Information Technology has an ROCE of 1.2%.
See our latest analysis for Wise Talent Information Technology
Is Wise Talent Information Technology’s ROCE Good?
One way to assess ROCE is to compare similar companies. In this analysis, Wise Talent Information Technology’s ROCE appears meaningfully below the 11% average reported by the Interactive Media and Services industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Independently of how Wise Talent Information Technology compares to its industry, its ROCE in absolute terms is low; especially compared to the ~1.6% available in government bonds. There are potentially more appealing investments elsewhere.
Wise Talent Information Technology delivered an ROCE of 1.2%, which is better than 3 years ago, as was making losses back then. That suggests the business has returned to profitability. You can see in the image below how Wise Talent Information Technology’s ROCE compares to its industry. Click to see more on past growth.
SEHK:6100 Past Revenue and Net Income May 15th 2020
It is important to remember that ROCE shows past performance, and is 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
What Are Current Liabilities, And How Do They Affect Wise Talent Information Technology’s ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Wise Talent Information Technology has total assets of CN¥4.2b and current liabilities of CN¥1.0b. As a result, its current liabilities are equal to approximately 24% of its total assets. This is not a high level of current liabilities, which would not boost the ROCE by much.
The Bottom Line On Wise Talent Information Technology’s ROCE
While that is good to see, Wise Talent Information Technology has a low ROCE and does not look attractive in this analysis. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
I will like Wise Talent Information Technology better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider 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.
