In This Article:
Today we'll look at China Resources Beer (Holdings) Company Limited (HKG:291) and reflect on its potential as an investment. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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 China Resources Beer (Holdings):
0.13 = CN¥3.1b ÷ (CN¥45b - CN¥22b) (Based on the trailing twelve months to June 2019.)
Therefore, China Resources Beer (Holdings) has an ROCE of 13%.
View our latest analysis for China Resources Beer (Holdings)
Does China Resources Beer (Holdings) Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that China Resources Beer (Holdings)'s ROCE is meaningfully better than the 6.1% average in the Beverage industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Independently of how China Resources Beer (Holdings) compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
Our data shows that China Resources Beer (Holdings) currently has an ROCE of 13%, compared to its ROCE of 6.6% 3 years ago. This makes us think the business might be improving. You can see in the image below how China Resources Beer (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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for China Resources Beer (Holdings).