Today we'll look at CITIC Telecom International Holdings Limited (HKG:1883) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into 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. And finally, we'll look at how its current liabilities are impacting 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. 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'.

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 CITIC Telecom International Holdings:

0.095 = HK$1.5b ÷ (HK$18b - HK$2.4b) (Based on the trailing twelve months to June 2019.)

Therefore, CITIC Telecom International Holdings has an ROCE of 9.5%.

See our latest analysis for CITIC Telecom International Holdings

Is CITIC Telecom International Holdings's ROCE Good?

One way to assess ROCE is to compare similar companies. Using our data, CITIC Telecom International Holdings's ROCE appears to be around the 8.2% average of the Telecom industry. Setting aside the industry comparison for now, CITIC Telecom International Holdings's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.

You can see in the image below how CITIC Telecom International 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 misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for CITIC Telecom International Holdings.