Today we are going to look at China Nonferrous Mining Corporation Limited (HKG:1258) 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, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting 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. Generally speaking a higher ROCE is better. 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'.

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 China Nonferrous Mining:

0.14 = US$361m ÷ (US$3.3b - US$782m) (Based on the trailing twelve months to December 2019.)

So, China Nonferrous Mining has an ROCE of 14%.

See our latest analysis for China Nonferrous Mining

Does China Nonferrous Mining Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. China Nonferrous Mining's ROCE appears to be substantially greater than the 6.9% average in the Metals and Mining industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Independently of how China Nonferrous Mining compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

In our analysis, China Nonferrous Mining's ROCE appears to be 14%, compared to 3 years ago, when its ROCE was 6.2%. This makes us think the business might be improving. You can see in the image below how China Nonferrous Mining's ROCE compares to its industry. Click to see more on 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Given the industry it operates in, China Nonferrous Mining could be considered cyclical. You can check if China Nonferrous Mining has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.