Today we are going to look at CIMC Vehicle (Group) Co., Ltd. (HKG:1839) to see whether it might be an attractive investment prospect. 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. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. 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 CIMC Vehicle (Group):

0.14 = CN¥1.5b ÷ (CN¥19b - CN¥8.1b) (Based on the trailing twelve months to December 2019.)

Therefore, CIMC Vehicle (Group) has an ROCE of 14%.

Check out our latest analysis for CIMC Vehicle (Group)

Is CIMC Vehicle (Group)'s ROCE Good?

One way to assess ROCE is to compare similar companies. Using our data, we find that CIMC Vehicle (Group)'s ROCE is meaningfully better than the 11% average in the Machinery industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Independently of how CIMC Vehicle (Group) compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

Our data shows that CIMC Vehicle (Group) currently has an ROCE of 14%, compared to its ROCE of 11% 3 years ago. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how CIMC Vehicle (Group)'s past growth compares to other companies.

When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. ROCE is only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

What Are Current Liabilities, And How Do They Affect CIMC Vehicle (Group)'s ROCE?

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

CIMC Vehicle (Group) has total assets of CN¥19b and current liabilities of CN¥8.1b. Therefore its current liabilities are equivalent to approximately 43% of its total assets. CIMC Vehicle (Group) has a middling amount of current liabilities, increasing its ROCE somewhat.

Our Take On CIMC Vehicle (Group)'s ROCE

While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. There might be better investments than CIMC Vehicle (Group) out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.