In This Article:
Today we'll look at CITIC Telecom International Holdings Limited (HKG:1883) 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.
First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect 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. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. 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?
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 CITIC Telecom International Holdings:
0.098 = HK$1.6b ÷ (HK$18b - HK$2.3b) (Based on the trailing twelve months to December 2019.)
Therefore, CITIC Telecom International Holdings has an ROCE of 9.8%.
View our latest analysis for CITIC Telecom International Holdings
Is CITIC Telecom International Holdings's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, CITIC Telecom International Holdings's ROCE is meaningfully higher than the 6.2% average in the Telecom industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from CITIC Telecom International Holdings's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
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. 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for CITIC Telecom International Holdings.
CITIC Telecom International Holdings's Current Liabilities And Their Impact On Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.