In This Article:
Today we'll look at Asia Cement (China) Holdings Corporation (HKG:743) 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.
First up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
What is 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. 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.
So, How Do We Calculate ROCE?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Asia Cement (China) Holdings:
0.27 = CN¥4.5b ÷ (CN¥23b - CN¥6.6b) (Based on the trailing twelve months to September 2019.)
Therefore, Asia Cement (China) Holdings has an ROCE of 27%.
View our latest analysis for Asia Cement (China) Holdings
Is Asia Cement (China) Holdings's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Asia Cement (China) Holdings's ROCE is meaningfully better than the 20% average in the Basic Materials industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the comparison to its industry for a moment, Asia Cement (China) Holdings's ROCE in absolute terms currently looks quite high.
In our analysis, Asia Cement (China) Holdings's ROCE appears to be 27%, compared to 3 years ago, when its ROCE was 3.0%. This makes us think about whether the company has been reinvesting shrewdly. The image below shows how Asia Cement (China) Holdings's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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 only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for Asia Cement (China) Holdings.