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Cheung Kong Holdings Ltd (OTCPK:CHEUY)
Return on Capital
7.03% (As of Dec. 2014)

Return on capital measures how well a company generates cash flow relative to the capital it has invested in its business. It is also called Return on Invested Capital (ROIC). Cheung Kong Holdings Ltd's annualized return on capital (ROC) for the quarter that ended in Dec. 2014 was 7.03%.

As of today, Cheung Kong Holdings Ltd's weighted average cost Of capital is 9.55%. Cheung Kong Holdings Ltd's return on capital is 5.59%. Cheung Kong Holdings Ltd earns returns that do not match up to its cost of capital. It will destroy value as it grows.


Definition

Cheung Kong Holdings Ltd's annualized Return on Capital (ROC) for the fiscal year that ended in Dec. 2012 is calculated as:

Return on Capital (ROC)(A: Dec. 2012 )
=NOPAT/Average Invested Capital
=Oper. Inc.*(1-Tax Rate)/( (Invested Capital (A: Dec. 2011 ) + Invested Capital (A: Dec. 2012 ))/2)
=2661.16129032 * ( 1 - 3.67% )/( (43297.029703 + 47194.1935484)/2)
=2563.49667097/45245.6116257
=5.67 %

where

Invested Capital(A: Dec. 2011 )
=Book Value of Debt + Book Value of Equity - Cash
=Long-Term Debt + Short-Term Debt + Total Equity - Cash
=2960.01028674 + 2944.19441944 + 39999.09991 - 2606.27491321
=43297.029703

Invested Capital(A: Dec. 2012 )
=Book Value of Debt + Book Value of Equity - Cash
=Long-Term Debt + Short-Term Debt + Total Equity - Cash
=5548.51612903 + 657.806451613 + 43805.8064516 - 2817.93548387
=47194.1935484

Cheung Kong Holdings Ltd's annualized Return on Capital (ROC) for the quarter that ended in Dec. 2014 is calculated as:

Return on Capital (ROC)(Q: Dec. 2014 )
=NOPAT/Average Invested Capital
=Oper. Inc.*(1-Tax Rate)/( (Invested Capital (Q: Jun. 2014 ) + Invested Capital (Q: Dec. 2014 ))/2)
=3634.20641983 * ( 1 - 1.39% )/( (49441.0186284 + 52442.9656569)/2)
=3583.69095059/50941.9921426
=7.03 %

where

Invested Capital(Q: Jun. 2014 )
=Book Value of Debt + Book Value of Equity - Cash
=Long-Term Debt + Short-Term Debt + Total Equity - Cash
=3953.50637288 + 1155.2453687 + 48838.3043501 - 4506.03746323
=49441.0186284

Invested Capital(Q: Dec. 2014 )
=Book Value of Debt + Book Value of Equity - Cash
=Long-Term Debt + Short-Term Debt + Total Equity - Cash
=2517.63583137 + 2366.74791401 + 51997.0080345 - 4438.42612295
=52442.9656569

Note: The Operating Income data used here is two times the semi-annual (Dec. 2014) operating income data.

* All numbers are in millions except for per share data and ratio. All numbers are in their own currency.


Explanation

Return on Capital measures how well a company generates cash flow relative to the capital it has invested in its business. It is also called Return on Invested Capital. The reason book values of debt and equity are used is because the book values are the capital the company received when issuing the debt or receiving the equity investments.

There are four key components to this definition. The first is the use of operating income rather than net income in the numerator. The second is the tax adjustment to this operating income, computed as a hypothetical tax based on an effective or marginal tax rate. The third is the use of book values for invested capital, rather than market values. The final is the timing difference; the capital invested is from the end of the prior year whereas the operating income is the current year’s number.

Why is Return on Capital important?

Because it costs money to raise capital. A firm that generates higher returns on investment than it costs the company to raise the capital needed for that investment is earning excess returns. A firm that expects to continue generating positive excess returns on new investments in the future will see its value increase as growth increases, whereas a firm that earns returns that do not match up to its cost of capital will destroy value as it grows.

As of today, Cheung Kong Holdings Ltd's weighted average cost Of capital is 9.55%. Cheung Kong Holdings Ltd's return on capital is 5.59%. Cheung Kong Holdings Ltd earns returns that do not match up to its cost of capital. It will destroy value as it grows.


Be Aware

Like ROE and ROA, ROC is calculated with only 12 months of data. Fluctuations in the company’s earnings or business cycles can affect the ratio drastically. It is important to look at the ratio from a long term perspective.


Related Terms

Return on Invested Capital, Return on Equity, Return on Assets, Return on Capital (Joel Greenblatt), Weighted Average Cost Of Capital


Historical Data

* All numbers are in millions except for per share data and ratio. All numbers are in their own currency.

Cheung Kong Holdings Ltd Annual Data

Dec03Dec04Dec05Dec06Dec07Dec08Dec09Dec10Dec11Dec12
ROC 1.872.361.094.060.002.935.216.363.325.67

Cheung Kong Holdings Ltd Semi-Annual Data

Jun10Dec10Jun11Dec11Jun12Dec12Jun13Dec13Jun14Dec14
ROC 7.175.674.592.166.135.354.337.244.147.03
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