Today we are going to look at China Oil And Gas Group Limited (HKG:603) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. 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.

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 China Oil And Gas Group:

0.09 = HK$1.1b ÷ (HK$17b - HK$4.5b) (Based on the trailing twelve months to December 2019.)

So, China Oil And Gas Group has an ROCE of 9.0%.

Check out our latest analysis for China Oil And Gas Group

Does China Oil And Gas Group Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, China Oil And Gas Group's ROCE appears to be around the 9.5% average of the Gas Utilities industry. Aside from the industry comparison, China Oil And Gas Group'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 China Oil And Gas Group's ROCE compares to its industry. Click to see more on past growth.

It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. How cyclical is China Oil And Gas Group? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

Do China Oil And Gas Group's Current Liabilities Skew Its ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

China Oil And Gas Group has total assets of HK$17b and current liabilities of HK$4.5b. Therefore its current liabilities are equivalent to approximately 27% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.

The Bottom Line On China Oil And Gas Group's ROCE

That said, China Oil And Gas Group's ROCE is mediocre, there may be more attractive investments around. Of course, you might also be able to find a better stock than China Oil And Gas Group. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

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.