Today we are going to look at New Universe Environmental Group Limited (HKG:436) to see whether it might be an attractive investment prospect. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting 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. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. Renowned investment researcher Michael Mauboussin has suggested 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?

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 New Universe Environmental Group:

0.079 = HK$97m ÷ (HK$1.6b - HK$386m) (Based on the trailing twelve months to June 2019.)

Therefore, New Universe Environmental Group has an ROCE of 7.9%.

View our latest analysis for New Universe Environmental Group

Does New Universe Environmental Group Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, New Universe Environmental Group's ROCE appears to be significantly below the 10% average in the Commercial Services industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Separate from how New Universe Environmental Group stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.

You can click on the image below to see (in greater detail) how New Universe Environmental Group's past growth compares to other companies.

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. You can check if New Universe Environmental Group has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.