In This Article:
Today we'll look at China Tianrui Automotive Interiors Co., Ltd. (HKG:6162) 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 of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
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. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
How Do You Calculate Return On Capital Employed?
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 Tianrui Automotive Interiors:
0.22 = CN¥51m ÷ (CN¥511m - CN¥278m) (Based on the trailing twelve months to June 2019.)
Therefore, China Tianrui Automotive Interiors has an ROCE of 22%.
View our latest analysis for China Tianrui Automotive Interiors
Does China Tianrui Automotive Interiors Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. China Tianrui Automotive Interiors's ROCE appears to be substantially greater than the 11% average in the Auto Components 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. Regardless of the industry comparison, in absolute terms, China Tianrui Automotive Interiors's ROCE currently appears to be excellent.
The image below shows how China Tianrui Automotive Interiors's ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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. You can check if China Tianrui Automotive Interiors has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.