In This Article:
Today we are going to look at Beijing Jingneng Clean Energy Co., Limited (HKG:579) to see whether it might be an attractive investment prospect. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First up, we’ll look at what ROCE is and how we calculate it. Second, we’ll look at its ROCE compared 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. In general, businesses with a higher ROCE are usually better quality. 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’.
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 Beijing Jingneng Clean Energy:
0.10 = CN¥3.4b ÷ (CN¥52b – CN¥17b) (Based on the trailing twelve months to June 2018.)
So, Beijing Jingneng Clean Energy has an ROCE of 10%.
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Is Beijing Jingneng Clean Energy’s ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Beijing Jingneng Clean Energy’s ROCE appears to be substantially greater than the 6.3% average in the Renewable Energy industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from Beijing Jingneng Clean Energy’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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 Beijing Jingneng Clean Energy.