In This Article:
Today we'll look at Dalian Port (PDA) Company Limited (HKG:2880) 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, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.
What is 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. Overall, it is a valuable metric that has its flaws. 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 Dalian Port (PDA):
0.041 = CN¥1.3b ÷ (CN¥35b - CN¥2.4b) (Based on the trailing twelve months to December 2019.)
Therefore, Dalian Port (PDA) has an ROCE of 4.1%.
Check out our latest analysis for Dalian Port (PDA)
Is Dalian Port (PDA)'s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. We can see Dalian Port (PDA)'s ROCE is meaningfully below the Infrastructure industry average of 7.6%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Independently of how Dalian Port (PDA) compares to its industry, its ROCE in absolute terms is low; especially compared to the ~1.6% available in government bonds. There are potentially more appealing investments elsewhere.
In our analysis, Dalian Port (PDA)'s ROCE appears to be 4.1%, compared to 3 years ago, when its ROCE was 2.6%. This makes us think the business might be improving. You can see in the image below how Dalian Port (PDA)'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. You can check if Dalian Port (PDA) has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.