What Does Intron Technology Holdings Limited’s (HKG:1760) 13% ROCE Say About The Business?

HKG:1760) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business." data-reactid="28">Today we'll evaluate Intron Technology Holdings Limited (HKG:1760) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.

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

says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike." data-reactid="31">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?

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 Intron Technology Holdings:

0.13 = CN¥160m ÷ (CN¥2.3b - CN¥1.0b) (Based on the trailing twelve months to December 2019.)

Therefore, Intron Technology Holdings has an ROCE of 13%.

Check out our latest analysis for Intron Technology Holdings " data-reactid="38"> Check out our latest analysis for Intron Technology Holdings

Does Intron Technology Holdings Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. It appears that Intron Technology Holdings's ROCE is fairly close to the Auto Components industry average of 12%. Regardless of where Intron Technology Holdings sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

We can see that, Intron Technology Holdings currently has an ROCE of 13%, less than the 37% it reported 3 years ago. This makes us wonder if the business is facing new challenges. The image below shows how Intron Technology Holdings's ROCE compares to its industry, and you can click it to see more detail on its past growth.

More

report on analyst forecasts for the company." data-reactid="54">When considering this metric, keep in mind that it is backwards looking, and 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, 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.

Do Intron Technology Holdings's Current Liabilities Skew Its 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Intron Technology Holdings has current liabilities of CN¥1.0b and total assets of CN¥2.3b. As a result, its current liabilities are equal to approximately 45% of its total assets. With this level of current liabilities, Intron Technology Holdings's ROCE is boosted somewhat.

Our Take On Intron Technology Holdings's ROCE

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