Today we'll look at Metallurgical Corporation of China Ltd. (HKG:1618) and reflect on its potential as an investment. 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.

Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. 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 Metallurgical Corporation of China:

0.089 = CN¥14b ÷ (CN¥479b - CN¥321b) (Based on the trailing twelve months to March 2020.)

So, Metallurgical Corporation of China has an ROCE of 8.9%.

See our latest analysis for Metallurgical Corporation of China

Is Metallurgical Corporation of China's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. We can see Metallurgical Corporation of China's ROCE is meaningfully below the Construction industry average of 13%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Separate from how Metallurgical Corporation of China 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.

We can see that, Metallurgical Corporation of China currently has an ROCE of 8.9% compared to its ROCE 3 years ago, which was 7.1%. This makes us wonder if the company is improving. The image below shows how Metallurgical Corporation of China's ROCE compares to its industry, and you can click it to see more detail on its past growth.

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Metallurgical Corporation of China.