Today we are going to look at China Netcom Technology Holdings Limited (HKG:8071) 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.

Understanding Return On Capital Employed (ROCE)

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. 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?

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 China Netcom Technology Holdings:

0.43 = HK$49m ÷ (HK$154m - HK$39m) (Based on the trailing twelve months to September 2019.)

So, China Netcom Technology Holdings has an ROCE of 43%.

See our latest analysis for China Netcom Technology Holdings

Is China Netcom Technology Holdings's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. In our analysis, China Netcom Technology Holdings's ROCE is meaningfully higher than the 9.4% average in the Software industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Putting aside its position relative to its industry for now, in absolute terms, China Netcom Technology Holdings's ROCE is currently very good.

China Netcom Technology Holdings reported an ROCE of 43% -- better than 3 years ago, when the company didn't make a profit. That suggests the business has returned to profitability. You can see in the image below how China Netcom Technology Holdings's ROCE compares to its industry. Click to see more on past growth.

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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. If China Netcom Technology Holdings is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.